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Activity 6 - Accounting For Franchise Operations

The document provides 5 problems related to accounting for franchise operations. Problem 1 asks how the transaction price would be allocated to performance obligations for a franchise agreement granting rights and equipment. Problem 2 asks for journal entries at signing, commencement, and year-end for a franchise agreement with payments and training services. Problem 3 asks for the entry to record a franchise granted with payments. Problem 4 asks for revenue recognition for franchise agreements with payments and costs incurred. Problem 5 asks for allocation of fees and revenue recognition for a franchise agreement with obligations and sales-based royalties.

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Sharon Ancheta
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159 views3 pages

Activity 6 - Accounting For Franchise Operations

The document provides 5 problems related to accounting for franchise operations. Problem 1 asks how the transaction price would be allocated to performance obligations for a franchise agreement granting rights and equipment. Problem 2 asks for journal entries at signing, commencement, and year-end for a franchise agreement with payments and training services. Problem 3 asks for the entry to record a franchise granted with payments. Problem 4 asks for revenue recognition for franchise agreements with payments and costs incurred. Problem 5 asks for allocation of fees and revenue recognition for a franchise agreement with obligations and sales-based royalties.

Uploaded by

Sharon Ancheta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Refresher Course 2

Franchise Operations
Activity No. 7

Problem 1

An entity enters into a contract with a customer and promises to grant a franchise license that
provides the customer with the right to use the entity’s trade name and sell the entity’s product
for ten years. The entity also promises to provide the equipment necessary to operate a
franchise outlet. In exchange for granting the license, the entity receives a sales-based royalty
of 5% of the customer’s monthly sales. Assume the fixed consideration for the equipment is
P1,500,000 payable when the equipment is delivered and the customer’s sales for the month is
P4,000,000.

Required: How would the transaction price be allocated to the performance obligation/s?

Problem 2

On January 1, 2022, Macas, Inc. signed an agreement granting Mc Co. to operate as a


franchisee for an initial franchise fee of P3,000,000. At that time, an amount of P1,000,000
was paid and the balance is payable in five annual payments beginning January 1, 2023. The
present value of the annual payments at 11% is P1,043,300. The agreement provides that the
down payment is non-refundable. On April 1, 2022, Mc Co. commences its operations and all
services related to franchise rights required of the franchisor has been substantially performed.
In addition to the franchise rights, Macas shall provide a year long training services beginning
on the signing date. These services have a value of P120,000.

Required: What are the journal entries on:


a. January 1, 2022 (date of signing the agreement)?
b. April 1, 2022 (date of commencement of operations)?
c. December 31, 2022 (end of reporting period)?

Problem 3

Andok Manok Corp. awarded its franchise to Chicken House for a total fee of P100,000. Of the
said amount, P50,000 was payable upon the signing of the agreement and the balance in two
equal annual payments. The contract provided that in the event the first year would result in
an operating loss, the franchising agreement may be cancelled without the need for returning
any portion of the franchise fee already paid nor the payment of any balance still unpaid.

Required: What is the entry to record the granting of franchise to Chicken House?

Problem 4

On October 30, 2022, Dior Co. entered into franchise agreement with three franchises. The
agreements required an initial fee payment of P700,000 plus four P300,000 payments due
every 2 months, the first payment due December 31, 2022. The present value of four equal
periodic payments for each franchisee is P1,089,000. The initial deposit is refundable until
substantial performance has been completed. The following information describes each
agreement:

Probability of full Services performed at Total costs incurred at


Franchisee collection Dec. 31, 2022 Dec. 31, 2022
Manila Corp. Likely Substantial P750,000
Makati Corp. Doubtful 25% 200,000
Ayala Co. Doubtful 30% 1,000,000

Required: Assuming P1,000,000 was received from each franchisee during 2022, what amount
of franchise revenue would be reported in December 31, 2022?

Problem 5

On January 1, 2022, an entity granted a franchise to a franchisee. The franchise agreement


requires 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 nonrefundable upfront fee on January 1, 2022.

In relation to the nonrefundable upfront fee, the franchise agreement requires 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 trade name for a period of ten years starting
January 1, 2022 with stand-alone selling price of P50,000.

On June 30, 2022, the entity completed the construction of the franchisee’s stall. As of
December 31, 2022, the entity was able to deliver 3,000 units of raw materials to the
franchisee. For the year ended December 31, 2022, the franchisee reported sales revenue
amounting to P100,000.

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

Required:
a. What is the amount of nonrefundable upfront fee to be allocated to the construction of the
franchisee’s stall?
b. What is the amount of revenue to be recognized in relation to the use of delivery of raw
materials for the year ended December 31, 2022?
c. 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, 2022?
d. What is the total revenue to be recognized by the entity for the year ended December 31,
2022?

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