Problem 1

ABC Company enters into a franchise agreement with XYZ Company on December 31, 20x4, giving XYZ
the right to operate as a franchisee of ABC for five years for P500,000. The initial franchise fee requires
ABC to grant XYZ:
1. The exclusive right to operate as the only franchisee of ABC in a particular area for 5-years,
2. The equipment needed for XYZ to operate as a franchisee of ABC, and,
3. Training services to be provided for a three-year period. Similar equipment and training can be
purchased elsewhere for P140,000 and P63,000 each respectively.
The equipment costs ABC P90,000 and training is estimated to costs P33,000. The franchise agreement
also requires ABC to receive 10% as royalty payments from the net revenues of XYZ Company.

ABC started to rain the employees of XYZ on January 1, 20x5. The equipment has delivered to XYZ on
April 1 and XYZ started operations on April 15 and generated sales of P2,000,000 for 20x5.
1. Determine the revenue to be recognized on December 31, 20x4.
2. Determine the revenue to be recognized on January 31, 20x5.
3. Determine the revenue to be recognized for the year 20x5 if XYZ issued a 5-year 10% interest
bearing note to ABC. XYZ is to start paying ABC P100,000 every December 31, starting on
December 31, 20x5.
4. Determine the net income to be recognized for the year 20x5 if XYZ issued a 5-year 10%
interest bearing note to ABC. XYZ is to start paying ABC P100,000 every December 31,
starting on December 31, 20x5.

Problem 2
Conrado enters into a franchise agreement with Little Boy Inc on January 1, 20x1, giving Conrado the right
to operate as a franchisee of Little Boy for 5 years. Little Boy charges an initial franchise fee of P500,000,
of this amount, P2000,000 is payable when the agreement is signed and the balance is payable in five annual
payments of P60,000 each on December 31.

The franchise agreement requires Little Boy to provide the following: rights to the trade name, market area,
updates on the technical and proprietary know-how for 5-years; initial training for Conrado; and machinery
and equipment.

The costs of the initial training and machinery and equipment to Little Boy is P30,000 and P50,000. Little
Boy’s normal mark-up for training is 50% and 20% for machinery and equipment.

The credit rating of Conrado indicates that money can be borrowed at 8%. The present value of an ordinary
annuity of P1 at 8% for five periods is 3.99.

Initial training is completed on January 31, 20x1 and Conrado starts franchise operations on March 1.
Conrado also promises to pay ongoing royalty payments of 1% of its annual sales, payable every January
1 the following year. The current year generated sales of P5,000,000.
1. Determine the revenue to be recognized in 20x1.
2. Determine the net income to be recognized in 20x1.

Problem 3
On January 1, 20x1, an entity granted a franchise to a franchisee. The franchise agreement requires the
franchisee to pay a non-refundable upfront fee in the amount of P1,1250,000 and on-going payment of
royalties equivalent to 10% of the sales of the franchisee. The franchisee paid the non-refundable upfront
fee on January 1, 20x1.
In relation to the non-refundable upfront fee, the franchise agreement requires the entity to render the
following performance obligations:
 • To construct the franchisee’s stall, other franchisors charge franchisees an amount of P405,000.
The franchisor’s prices are generally 10% lower than what is charged by those franchisors.
• To deliver 50,000 units of raw materials to the franchisee. The cost of these raw materials is
P300,000, the franchise typically charges 40% above cost on similar sales.
• To allow the franchisee to use the entity trade name for a period of 10 years starting January 1,
20x1 with stand-alone selling price of P330,000.

On September 1, 20x2, the entity completed the construction of the franchisee’s stall. As of December 31,
20x1, the entity was able to deliver 20,000 units of raw materials to the franchisee. For the year ended
December 31, 20x1, the franchisee reported sales revenue amounting to P400,000.

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

How much is the total revenue to be recognized for the year 20x1?

Problem 4
ABC entered into a franchise agreement on December 31, 20x2 giving XYZ the right to operate as a
franchise for ABC for 5 years. ABC charged XYZ an initial franchise fee of P500,000 for the right to
operate as a franchise. Of this amount, P100,000 is payable when the parties sign the agreement, and the
note balance is payable in five annual payments of P80,000 each starting on December 31, 20x2. As part
of the agreement, ABC helps locate the site, negotiate the lease or purchase of the site, supervise the
construction activity, and provide employee training and the equipment necessary to be a distributor of its
products. Similar training services and equipment are sold separately.

XYZ also promises to pay ongoing royalty payments of 1% of its annual sales (payable each January 31 of
the following year) and is obliged to purchase products from ABC at its current stand-alone selling price at
the same time of purchase. The credit rating of XYZ indicates that the money can be borrowed at 10%.
The PV of ordinary annuity of 10% for 5 years is 3.791 and the PV of annuity due of 10 for 5 years is 4.170.

The following are the allocation of transaction price of the performance obligations:
Right to access the trade name, market, and proprietary know-how, 50% of transaction price.
Training service, 35% of transaction price.
Equipment, 15% of transaction price.

The above obligations are separate and distinct from one another.

Training is completed in January 20x3, the equipment id installed in January 20x3 and XYZ’s grand
opening is April 1, 20x3. For the year ended December 31, 20x3, the franchisee reported sales revenue
amounting to P1,500,000.

What is the total revenue recognized on December 31, 20x3?

 A. C.
B. D.

On January 1, 20x1, Parent Company acquired 3,000 shares of Subsidiary Company by issuing 1,000 of
their P400 par value shares. Any difference between the cost of acquisition and the book value of the
assets acquired is allocated 20% to goodwill and 80% to a depreciable asset with a remaining useful life of
5 years. The non-controlling interest is to be valued at fair value. On this date, Subsidiary company reports
Common stock (par P50) of P250,000, Share Premium, P50,000 and Retained Earnings of P150,000. Parent
Company pays direct acquisition costs of P70,000. Stock issue costs of P60,000 remain unpaid.
The fair values of Parent Company shares and Subsidiary Company shares amount to P450 and P140 each
respectively on January 1, 20x1.

1. Determine the goodwill to be reported in the consolidated balance sheet.

A. 280,000 C. 300,000
B. 56,000 D. 60,000
2. Determine the increase/(decrease) in the retained earnings of Parent Company after the acquisition.
A. (130,000) C. (70,000)
B. (80,000) D. (60,000)
3. Determine the increase/(decrease) in the stockholders’ equity of Parent Company after the
acquisition.
A. 660,000 C. 600,000
B. 620,000 D. 450,000

Parent Company acquires 80% of the outstanding shares of Subsidiary Company for P1,400,000. On this
date, the net assets of the subsidiary have book and fair values of P1,700,000 and P1,800,000 while the
liabilities have book and fair values of P200,000. The non-controlling interest has a fair value of P500,000.
Parent and Subsidiary’s retained earnings amount to P800,000 and P500,000 each respectively. Acquisition
costs related to the acquisition amount to P50,000.

4. Determine the consolidated retained earnings to be reported on the consolidated balance sheet.
A. 840,000 C. 790,000
B. 800,000 D. 750,000

5. Determine the increase or decrease in the assets of Parent Company in the consolidated balance
sheet.
A. 650,000 C. 450,000
B. 550,000 D. 400,000