1C

2C
3D
4C
5A
Problem 1: On January 1, 2020, Mr. Joven entered into a franchise agreement with ONG to market
their products. The agreement provides for an initial fee of P12, 500,000 payable as follows:
P3,500,000 to be paid upon signing of the contract and the balance in five equal annual installments
every end of the year starting December 31, 2020. Mr. Joven signed a non-interest bearing note for
the balance. His credit rating indicates that he can borrow money at 15% interest for a loan of this
type. The present value of an annuity of P1 at 15% for 5 periods is 3.352. The agreement further
provides that the franchisee must pay a continuing franchise fee equal to 3% of the monthly gross
sales. On August 31, the franchiser completed the initial services required in the contract at a cost of
P4,290,120 and incurred indirect cost of P175,000. The franchisee commenced business operations
on November 30, 2020. The gross sales reported to the franchiser were P1,800,000 for December
2020. The first installment payment was made in due date.

1.       Assume the collectability of the note is not reasonably assured, how much is the net income for
the year-ended, December 31, 2020?
a.       3,126,268
b.       3,201,268
c.       2,417,268
d.       3,072,268
2.       Assume the collectability of the note is reasonably assured, how much is the net income for the
year ended, December 31, 2020?
a.       9,438,880
b.       9,384,880
c.       6,027,520
d.       6,552,520

Solution

1
Transaction price

Cash Downpayment 3,500,000.00

Note Receivable 12,500,000.00 (3,500,000.00) 9,000,000.00
Periodic Payment 5 1,800,000.00
Multiply to PV at 15% for 5 periods 3.352 6,033,600.00
Transaction Price 9,533,600.00

Less: Direct Costs (4,290,120.00)

Gross Profit 5,243,480.00
Gross Profit Rate 55%

January 1, 2020
Cash 3,500,000.00
Note Receivable 9,500,000.00
Contract Liability 9,533,600.00
Discount on Notes Receivable 3,466,400.00

August 31, 2020

Contract Liability 3,500,000.00
Revenue 3,500,000.00

Deferred Cost of Franchise 4,290,120.00

Expenses (Indirect Cost) 175,000.00
Cash 4,465,120.00

Cost of Franchise 1,575,000.00

Deferred Cost of Franchise 1,575,000.00

December 31, 2020

Cash 1,800,000.00
Notes Receivable 1,800,000.00

Discount on Notes Receivable 905,040.00

Interest Income 905,040.00

Contract Liability 894,960.00

Revenue 894,960.00

Cost of Franchise 402,732.00

Deferred Cost of Franchise 402,732.00

Cash 54,000.00
Revenue (1,800,000 x 3%) 54,000.00

Computation of Net Income

Revenue
August 3,500,000.00
December 894,960.00
Less: Cost of Franchise
August (1,575,000.00)
December (402,732.00)
Gross Profit 2,417,228.00
Interest Income 905,040.00
Indirect Costs (175,000.00)
Royalties 54,000.00
Net Income 3,201,268.00
 ith ONG to market
e as follows:
annual installments
est bearing note for
st for a loan of this
reement further
the monthly gross
contract at a cost of
business operations
000 for December

is the net income for

e net income for the

2
Transaction price

Cash Downpayment 3,500,000.00

Note Receivable 12,500,000.00 (3,500,000.00) 9,000,000.00
Periodic Payment 5 1,800,000.00
Multiply to PV at 15% for 5 periods 3.352 6,033,600.00
Transaction Price 9,533,600.00

Less: Direct Costs (4,290,120.00)

Gross Profit 5,243,480.00
Gross Profit Rate 55%

January 1, 2020
Cash 3,500,000.00
Note Receivable 9,500,000.00
Contract Liability 9,533,600.00
Discount on Notes Receivable 3,466,400.00

August 31, 2020

Contract Liability 9,533,600.00
Revenue 9,533,600.00

Deferred Cost of Franchise 4,290,120.00

Expenses (Indirect Cost) 175,000.00
Cash 4,465,120.00

Cost of Franchise 4,290,120.00

Deferred Cost of Franchise 4,290,120.00

December 31, 2020

Cash 1,800,000.00
Notes Receivable 1,800,000.00

Discount on Notes Receivable 905,040.00

Interest Income 905,040.00

Cash 54,000.00
Revenue (1,800,000 x 3%) 54,000.00

Computation of Net Income

Revenue
August 9,533,600.00
December -
Less: Cost of Franchise
August (4,290,120.00)
December -
Gross Profit 5,243,480.00
Interest Income 905,040.00
Indirect Costs (175,000.00)
Royalties 54,000.00
Net Income 6,027,520.00
Problem 2: XY, Inc., franchisor, entered into franchise agreement with AB, Inc., franchisee on July 1,
2020. The initial franchise fees agreed upon is P850,000, of which P150,000 is payable upon signing and
the balance to be covered by a non-interest bearing note payable in four equal annual installments. It
was agreed that the down payment is not refundable, not withstanding lack of substantial performance
of services by franchiser. Probability of collection is unlikely.

The following expenses were incurred:

Initial services:
Direct cost 235,000
Indirect cost 64,000
Continuing services:
Direct cost 23,900
Indirect cost 9,000

The management of AB has estimated that they can borrow loan at the rate of 12% (PV factor 3.04). The
franchisee commenced its operation on July 31, 2020. A continuing franchise fee equal to 5% of its
monthly gross sales was also specified in the contract. AB reported gross sales of P950,000 for the
month.

1.       How much is the net income to be reported on August 31, 2020?
a.       59,550
b.       83,450
c.       48,910
d.       72,810

Solution

1
Transaction price

Cash Downpayment 150,000.00

Note Receivable 850,000.00 (150,000.00) 700,000.00
Periodic Payment 4 175,000.00
Multiply to PV at 15% for 5 periods 3.040 532,000.00
Transaction Price 682,000.00

Less: Direct Costs (235,000.00)

Gross Profit 447,000.00
Gross Profit Rate 65.540%
January 1, 2020
Cash 150,000.00
Note Receivable 700,000.00
Contract Liability 682,000.00
Discount on Notes Receivable 168,000.00

July 31, 2020

Contract Liability 150,000.00
Revenue 150,000.00

Deferred Cost of Franchise 235,000.00

Expenses (Indirect Cost) 64,000.00
Cash 299,000.00

Cost of Franchise 51,690.00

Deferred Cost of Franchise 51,690.00

August 31, 2020

Cash 47,500.00
Revenue (950,000 x 5%) 47,500.00

Discount on Notes Receivable 10,640.00

Interest Income 10,640.00
532,000.00 12% 2 months

Computation of Net Income

Revenue
July 150,000.00
Less: Cost of Franchise
July (51,690.00)
Gross Profit 98,310.00
Interest Income 10,640.00
Indirect Costs - Initial Services (64,000.00)
Direct costs - Continuing Services (23,900.00)
Indirect costs - Continuing Services (9,000.00)
Royalties 47,500.00
Net Income 59,550.00
nchisee on July 1,
ble upon signing and
nual installments. It
stantial performance

% (PV factor 3.04). The

qual to 5% of its
950,000 for the
Problem 3: Mike restaurant sold a fast food restaurant franchise to Irish. The sale agreement,
signed on January 2020 called for a P100,000 down payment plus two P50,000 annual
payments representing the value of initial franchise services rendered by Mike restaurant. In
addition, the agreement required the franchisee to pay 8% of its gross revenues to the
franchisor. The restaurant opened in early in 2020 and its sales for the year amounted to
P750,000. The prevailing rate for similar note was 12% (PV factor was 1.6901).

1.       How much is the total revenue?

a.       84,505
b.       244,505
c.       254,646
d.       266,646

Solution

Transaction price

Cash Downpayment 100,000.00

Note Receivable 200,000.00 (100,000.00) 100,000.00
Periodic Payment 2 50,000.00
Multiply to PV at 15% for 5 periods 1.690 84,505.00
Transaction Price 184,505.00

Cash 100,000.00
Note Receivable 100,000.00
Revenue 184,505.00
Discount on Notes Receivable

Cash 750,000.00 8% 60,000.00

Revenue 60,000.00

Discount on Notes 10,140.60

Interest Income 10,140.60
84,505.00 12%

Total Revenue 254,645.60

Problem 4: On April 1, 2020, GOOD Inc. entered into a franchise agreement with BEST
Franchisee. The initial franchise fees agreed upon is P246,900, of which P46,900 is
payable upon signing and the balance to be covered by a non-interest bearing note
payable in four equal annual installments. The down payment is refundable within 100
days. Best Inc. has a high credit rating, thus, collection of the note is reasonably assured.
Out-of-pocket costs of P125,331 and P12,345 were incurred for direct expenses and
indirect expenses respectively. Prevailing market rate is 9%. PV factor is 3.2397.

1.       For the fiscal year ended June 30, 2020, how much revenue from franchise fee will the franchisor reco
a.       0
b.       208,885
c.       246,900
d.       83,554

Solution

Transaction price

Cash Downpayment 46,900.00

Note Receivable 246,900.00 (46,900.00) 200,000.00
Periodic Payment 4 50,000.00
Multiply to PV at 15% for 5 periods 3.240 161,985.00
Transaction Price 208,885.00

Cash 46,900.00
Note Receivable 200,000.00
Contract Liability 208,885.00
Discount on Notes Receivable 38,015.00
ee will the franchisor recognize?
Problem 5: McJobee operates and franchises restaurants around the world. On January
1, 2020, Mcjobee entered into a franchise agreement with a franchisee. As part of its
franchise agreement. Mcjobee requires the franchisee to pay a non-refundable upfront
fee of P95,000 upon opening a restaurant and ongoing payment of royalties based on
10% of franchisee’s sales. As part of the franchise agreement, Mcjobee provides pre-
opening services, including supply and installation of cooking equipment and cash
registers, valued at P30,000, which is the stand-alone selling price of the pre-opening
services. In addition, the franchise agreement includes a license of Intellectual Property
such as Mcjobee’s trademark and trade name to the franchisee. Mcjobee has
determined that the license provides right to access the Intellectual Property over time.
Mcjobee has term of 10 years. On January 1, 2020, the franchisee paid the non-
refundable upfront franchise fee of P95,000 to Mcjobee.

Mcjobee evaluates arrangement and determined it meets the criteria to be accounted

for as a contract with a customer under IFRS 15. Mcjobee determines its pre-opening
services and license of Intellectual Property are each distinct, and therefore need to be
accounted for as separate performance obligations. As of December 31, 2020, Mcjobee
already satisfied its performance obligation to supply and install cooking equipment and
cash registers to franchisee. For the year ended December 31, 2020, the franchisee
reported sales revenue of P100,000.

1.       Under IFRS 15, how much total revenue shall be recognized by Mcjobee for the
year-ended December 31, 2020?
a.       95,000
b.       28,500
c.       6,650
d.       45,150

Solution

Transaction price 95,000.00

Allocation of Transaction price

Stand-alone Percentage Allocation
Pre-opening Services 30,000.00 30% 28,500.00
Franchise 70,000.00 70% 66,500.00
Total 100,000.00 95,000.00
January 1, 2020
Cash 95,000.00
Contract Liability 95,000.00

December 31, 2020

Contract Liability 28,500.00
Revenue 28,500.00
To record the revenue from pre-opening services

Contract Liability 6,650.00

Revenue 6,650.00
To record the revenue from granting of franchise
66,500 divide by: 10 years 6,650.00

Cash 10,000.00
Revenue 10,000.00
To record continuing franchise fee
100,000 x 10%

Total Revenue 45,150.00

Problem 6: On January 1, 2020, an entity granted a franchise to a franchisee. The franchise
agreement required the franchisee to pay a nonrefundable upfront fee in the amount of
P400,000 and on-going payment of royalties equivalent to 5% of the sales of the franchisee.
The franchisee paid the non-refundable upfront fee on January 1, 2020.

In relation to the nonrefundable upfront fee, the franchise agreement required the entity
to render the following performance obligations:

·         To construct the franchisee’s stall with stand-alone selling price of P200,000

·         To deliver 10,000 units of raw materials to the franchisee with stand-alone selling price
of P250,000.
·         To allow the franchisee to use the entity tradename for a period of 10 years starting
January 1, 2020 with stand-alone selling price of P50,000.

On June 30, 2020, the entity completed the construction of the franchisee’s stall. On
December 31, 2020, the entity was able to deliver 3,000 units of raw materials to the
franchisee. For the year-ended December 31, 2020, the franchisee reported sales revenue
amounting to P100,000.

The entity has determined that the performance obligations are separate and distinct from
one another.

1.       What is the amount of nonrefundable upfront fee to be allocated to the construction
of franchisee’s stall?
a.       200,000
b.       160,000
c.       250,000
d.       120,000

2.       What Is the amount of revenue to be recognized in relation to the use of the delivery
of raw materials for the year-ended December 31, 2020?

a.       100,000
b.       200,000
c.       60,000
d.       75,000
3.       What is the amount of revenue to be recognized in relation to the use of entity’s trade
name for the year ended December 31, 2020?
a.       5,000
b.       4,000
c.       50,000
d.       10,000
Transaction price 400,000.00

Allocation of Transaction Price

Stand-alone Percentage Allocation
Construction of stall 200,000.00 40% 160,000.00
Materials 10,000.00 250,000.00 50% 200,000.00
Tradename 10 years 50,000.00 10% 40,000.00
Total 500,000.00 100% 400,000.00

Revenue Earned Unearned

Construction of stall 160,000.00
Materials 3,000.00 60,000.00 140,000.00
Tradename 1 year 4,000.00 36,000.00
Royalties 100,000.00 5% 5,000.00
TOTAL 229,000.00 176,000.00
Problem 7: Starbeans Inc. operates and franchises coffee shops around the world. On January 1,
2020, Starbeans Inc. entered into a franchise agreement with a franchisee. As part of its franchise
agreement. Starbeans requires a franchisee to pay an initial franchise fee in the amount of
P1,500,000 of which P500,000 is payable at the date of perfection of contract and the balance
payable in five equal annual installments every December 31. The franchisee issued a non-interest
bearing note with effective interest rate of 10% for the balance of the initial franchise fee and the
present value of the note is P758,157. The franchise agreement also provides for ongoing payment
of royalties of 5% based on sales revenue of franchisee. As part of the franchise agreement,
Starbeans provides pre-opening services, including supply and installation of coffee equipment and
cash registers with a total cost of P754,894. Starbeans evaluates and determined that the contract,
with the customer is a single performance obligation that need not be separated. As of July 1, 2020,
Mcjobee already satisfied its performance obligation to supply and install coffee equipment and
cash registers to the franchisee. For the year ended December 31, 2020, the franchisee reported
sales revenue in the amount of P1,000,000.

1.       What is the net income to be reported by Starbeans for the year ended December 31, 2020, if
the collection of the note receivable is reasonably assured?

a.       629,079
b.       579,079
c.       553,263
d.       503,263

2.       What is the net income to be reported by Starbeans for the year ended December 31, 2020, if
the collection of the note receivable is not reasonably assured?

a.       375,490
b.       325,490
c.       299,674
d.       125,816

1
Transaction price

Cash Downpayment 500,000.00

Note Receivable 1,500,000.00 (500,000.00) 1,000,000.00
Periodic Payment 5 200,000.00
Multiply to PV at 15% for 5 periods 3.791 758,157.00
Transaction Price 1,258,157.00

Less: Direct Costs (754,894.00)

Gross Profit 503,263.00
Gross Profit Rate 40%
January 1, 2020
Cash 500,000.00
Note Receivable 1,000,000.00
Contract Liability 1,258,157.00
Discount on Notes Receivable 241,843.00

Deferred Cost of Franchise 754,894.00

Cash 754,894.00

July 1, 2020
Contract Liability 1,258,157.00
Revenue 1,258,157.00

Cost of Franchise 754,894.00

Deferred Cost of Franchise 754,894.00

December 31, 2020

Cash 200,000.00
Notes Receivable 200,000.00

Discount on Notes Receivable 75,815.70

Interest Income 75,815.70

Cash 50,000.00
Revenue (1,000,000 x 5%) 50,000.00

Computation of Net Income

Revenue
July 1,258,157.00
Less: Cost of Franchise
July (754,894.00)
Gross Profit 503,263.00
Interest Income 75,815.70
Royalties 50,000.00
Net Income 629,078.70
 1
Transaction price

Cash Downpayment 500,000.00

Note Receivable 1,500,000.00 (500,000.00) 1,000,000.00
Periodic Payment 5 200,000.00
Multiply to PV at 15% for 5 periods 3.791 758,157.00
Transaction Price 1,258,157.00

Less: Direct Costs (754,894.00)

Gross Profit 503,263.00
Gross Profit Rate 40%
January 1, 2020
Cash 500,000.00
Note Receivable 1,000,000.00
Contract Liability 1,258,157.00
Discount on Notes Receivable 241,843.00

Deferred Cost of Franchise 754,894.00

Cash 754,894.00

July 1, 2020
Contract Liability 500,000.00
Revenue 500,000.00

Cost of Franchise 300,000.00

Deferred Cost of Franchise 300,000.00

December 31, 2020

Cash 200,000.00
Notes Receivable 200,000.00

Discount on Notes Receivable 75,815.70

Interest Income 75,815.70

Contract Liability 124,184.30

Revenue 124,184.30

Cost of Franchise 74,510.58

Deferred Cost of Franchise 74,510.58

Cash 50,000.00
Revenue (1,000,000 x 5%) 50,000.00

Computation of Net Income

Revenue
July 500,000.00
December 124,184.30
Less: Cost of Franchise
July (300,000.00)
December (74,510.58)
Gross Profit 249,673.72
Interest Income 75,815.70
Royalties 50,000.00
Net Income 375,489.42
Problem 8: On January 1, 2018, an entity granted a franchise agreement to a franchise. The
contract provided that the franchisee shall pay an initial franchise fee of P500,000 and on-
going payment of royalties equivalent to 8% of the sales of the franchisee.

On January 1, 2018, the franchisee paid down payment of P200,000 and issued a 3-year
noninterest bearing note for the balance payable in three equal annual installments starting
December 31, 2018. The note has present value of P240,183 with effective interest rate of
12%.

On June 30, 2018, the entity completed the performance obligation of the franchise at a cost
of 352,146. Aside from that, the entity incurred indirect cost of P22,009.

The franchisee started operation on July 1, 2018 and reported sales revenue amounting to
P50,000 for the year ended December 31, 2018. The franchisee paid the first installment on its
due date.

1.       If the collection of the note receivable is reasonably assured, what is the gross profit to be
recognized by the entity for the year ended December 31, 2018 in relation to the initial
franchise fee?
a.       66,028
b.       44,014
c.       22,009
d.       88,037

2.       If the collection of the note receivable is reasonably assured, what is the net income to be
reported by the entity for the year ended December 31, 2018?

a.       98,850
b.       94,850
c.       70,028
d. 92037

Solution

Transaction price

Cash Downpayment 200,000.00

Note Receivable 500,000.00 (200,000.00) 300,000.00
Periodic Payment 3 100,000.00
Multiply to PV at 15% for 5 periods 2.402 240,183.00
Transaction Price 440,183.00

Less: Direct Costs (352,146.00)

Gross Profit 88,037.00
Gross Profit Rate 20%
January 1, 2018
Cash 200,000.00
Note Receivable 300,000.00
Contract Liability 440,183.00
Discount on Notes Receivable 59,817.00

Deferred Cost of Franchise 352,146.00

Expense (Indirect Cost) 22,009.00
Cash 374,155.00

June 30, 2018

Contract Liability 440,183.00
Revenue 440,183.00

Cost of Franchise 352,146.00

Deferred Cost of Franchise 352,146.00

December 31, 2020

Cash 100,000.00
Notes Receivable 100,000.00

Discount on Notes Receivable 28,821.96

Interest Income 28,821.96

Cash 4,000.00
Revenue (50,000 x 8%) 4,000.00

Computation of Net Income

Revenue
July 440,183.00
Less: Cost of Franchise
July (352,146.00)
Gross Profit 88,037.00
Interest Income 28,821.96
Royalties 4,000.00
Indirect Cost (22,009.00)
Net Income 98,849.96
Problem 9: On October 20, 2016, Abraham Company signed 40 freezers to
Holden Company costing P14,000 each for sale at P20,000 each and paid
P16,000 in transportation costs. On December 30, 2016, Holden reported
the sale of 10 freezers and remitted P170,000. The remittance was net of
the agreed 15% commission.

1.       What amount should Abraham recognize as consignment sales revenue for 2016?
a.       150,000
b.       175,000
c.       200,000
d.       400,000
2.       What amount should Holden recognize as commission income fee for 2016?
a.       22,500
b.       26,250
c.       30,000
d.       60,000