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Franchise Sample Problem

Mc Jolly Corporation entered into a 5-year franchise agreement with J-Bee Co. J-Bee Co. paid an initial franchise fee of P50,000 which includes P20,000 upfront and a P6,000 note for 5 years at 18% interest annually. J-Bee Co. also pays 1% of annual sales as an ongoing royalty and purchases products from Mc Jolly. The document provides calculations of net income under accrual, installment gross profit, and installment cost recovery accounting methods based on additional financial information provided.

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53 views2 pages

Franchise Sample Problem

Mc Jolly Corporation entered into a 5-year franchise agreement with J-Bee Co. J-Bee Co. paid an initial franchise fee of P50,000 which includes P20,000 upfront and a P6,000 note for 5 years at 18% interest annually. J-Bee Co. also pays 1% of annual sales as an ongoing royalty and purchases products from Mc Jolly. The document provides calculations of net income under accrual, installment gross profit, and installment cost recovery accounting methods based on additional financial information provided.

Uploaded by

eira
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PROBLEM SOLVING – Accounting for Franchises AST-FRNCH-1

On December 31, 2017, Mc Jolly Corporation entered into a five year franchise agreement giving J-
Bee Co. the right to operate as a franchisee. Mc Jolly charged J-Bee Co. an initial franchise fee (IFF) of
P50,000 for the right to operate as a franchisee. Of this amount, P20,000 is payable when J-Bee Co. signs
the agreement, and issued a note for the balance which is payable in five annual payments of P6,000
every December 31. 18% interest is charged annually based on the annual payment.
As part of the arrangement, J-Bee Co. also promises to pay ongoing royalty payments (CFF) of 1%
of its annual sales (payable at every January 31 of the following year) and is obliged to purchase products
from Mc Jolly at its current stand alone selling price at the time of purchase.

Additional Information:
 Cost of the franchise P32,500 (cost of sales / cost of initial services)
 Cost of continuing services P2,000
 Other indirect costs and expenses P1,500
 Sales for the year is P500,000
 Other income from the sale of equipment P3,500

Compute for the following:


1. Net income under accrual basis of accounting
2. Net income under installment basis (Gross profit method) of accounting
3. Net income under installment basis (Cost recovery method) of accounting

Solution:
Accrual basis of accounting
IFF – Cash DP 20,000
- PN (6Kx5) 30,000
Total Revenue 50,000
Cost of Franchise 32,500
Gross profit 17,500 35%
OPEX (2K+1.5K) (3,500)
Net Income before.. 14,000
+- Other Inc/Exp
CFF (500x1%) 5,000
OI from Eqpt 3,500
Int. Inc. 1,080 (6K x 18%)
Net Income 23,580

Installment basis (Gross profit method) of accounting


IFF – Cash DP 20,000
- PN (6Kx1) 6,000
Total Collections 26,000
GPRate 35%
Gross profit 9,100 35%
OPEX (2K+1.5K) (3,500)
Net Income before.. 5,600
+- Other Inc/Exp
CFF (500x1%) 5,000
OI from Eqpt 3,500
Int. Inc. 1,080 (6K x 18%)
Net Income 15,180

Installment basis (Cost recovery method) of accounting – collections is equal to revenue


IFF – Cash DP 20,000
- PN (6Kx1) 6,000
Total Collections 26,000 Total Revenue
Cost of Franchise 32,500
Gross profit (6,500)
OPEX (2K+1.5K) (3,500)
Net Loss before.. (10,000)
+- Other Inc/Exp
CFF (500x1%) 5,000
OI from Eqpt 3,500
Int. Inc. 1,080 (6K x 18%)
Net Income 420

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