lOMoARcPSD|9437033 lOMoARcPSD|9437033
Fr anchise Fr anchise
Advanced Financial Accounting and Reporting (AFAR) Advanced Financial Accounting and Reporting (AFAR)
Problem A 4. How much is the franchise revenue if the down payment is nonrefundable, the
On January 1, 2021, ABC Company sells a franchise to Mr. X for an initial franchise fee collectability of the note is not reasonably assured and there is substantial
of P4,000,000. Upon signing the contract on the same day, Mr. X paid 50% of the said performance of services equivalent to the down payment?
amount and the balance shall be paid in 5 annual equal installments starting December A. 20,000
31, 2021. Mr. X issued an interest-bearing note for the said balance with interest rate of B. 149,423
10%. Assume that the cost of the initial franchise fee amounted to P3,000,000 C. 180,000
1. How much is the franchise revenue if the franchiser has substantially performed D. 750,578.60
all the services required by the initial franchise fee, the down payment is E. ANSWER: C
nonrefundable and the collection of the note is reasonably assured?
A. 400,000 Problem C
B. 2,000,000 ABC Company sells a franchise with initial franchise fee of P70,000. A down payment of
C. 4,000,000 P20,000 cash is required, with the balance covered by issuance of a P50,000, 10% note
D. 4,400,000 payable in five equal annual installment.
ANSWER: C
1. If all material services have been substantially performed, collectability of the note
2. How much is the realized gross profit initial franchise if the down payment is is reasonably assured, but the refund period has not expired, what is the journal
nonrefundable, the collectability of the note is not reasonably assured and the entry to record the transaction?
franchiser has performed all the services required?
A. 600,000 2. If all material services have been substantially performed, collectability of note is
B. 2,000,000 reasonably assured, and the refund period has been expired, what is the journal
C. 4,000,000 entry to record the transaction?
D. 4,400,000
ANSWER: A 3. If all material services have been substantially performed, collectability of the non-
interest bearing note, with implicit rate of 10%, is reasonably assured, and the
Problem B refund period has been expired, what is the journal entry to record the transaction?
ABC Company charges an initial franchise fee of P900,000 to Mrs. X for the right to
operate as a franchisee of ABC Company. Of this amount P180,000 is payable when the Problem D
agreement is signed and the balance is payable in 4 equal installment payments. In return On January 1, 2021, Mr. X entered into a franchise agreement with ABC, Inc. to sell
for the payment of initial franchise fee, the franchisor will assist the franchisee to locate computer products. The agreement provides of an initial franchise fee of P30,000,000,
the site, supervise the construction activity and provide bookkeeping services. The credit payable as follows: P18,000,000 cash to be paid upon signing of the contract, and the
rating of the franchisee indicates that money can be borrowed at 10%. The present value balance in five equal annual payments every December 31 starting 2021. Mr. X signs a
of an ordinary annuity factor is 3.16987 12% interest bearing note for the balance. The agreement further provides that the
1. How much is the franchise revenue if the down payment is refundable, the franchisor will assist the franchisee in locating the business site, designing and
collectability of the note is reasonably assured but the substantial services remain supervising the construction of the building, and training of management and employees.
to be performed? The agreement also provides that the franchisee must pay a continuing franchise fees
A. 0 equal to 10% of its monthly gross sales.
B. 149,423 On June 30, 2021, the franchisor completed the initial services required by the contract
C. 180,000 at a costs of P8,000,000, of which 25% was indirect. The franchisee commenced
D. 750,578.60 business operations on July 5, 2021. The gross sales reported to the franchisee to the
ANSWER: A franchisor are: July sales P150,000; August sales P180,000; September sales P270,000;
2. How much is the franchise revenue if the down payment is nonrefundable, the October sales P200,000; November sales P580,000; and December sales P720,000.
collectability of the note is reasonably assured and there is substantial
performance of services? 1. Compute for the net income earned during the year 2021, assuming the
A. 0 collectability of the note is reasonably assured
B. 149,423 A. 14,530,000
C. 180,000 B. 15,970,000
D. 750,578.60 C. 23,650,000
ANSWER: D D. 24,210,000
ANSWER: C
3. How much is the franchise revenue if the down payment is nonrefundable, the
collectability of the note is not reasonably assured and there is substantial 2. Compute for the net income earned during the year 2021, assuming the
performance of services? collectability of the note is not reasonably assured
A. 0 A. 14,530,000
B. 149,423 B. 15,970,000
C. 180,000 C. 23,650,000
D. 750,578.60 D. 24,210,000
ANSWER: C ANSWER: B
Downloaded by Marielle Guerra_04 (gmarielle42@gmail.com) Downloaded by Marielle Guerra_04 (gmarielle42@gmail.com)
lOMoARcPSD|9437033 lOMoARcPSD|9437033
Fr anchise Fr anchise
Advanced Financial Accounting and Reporting (AFAR) Advanced Financial Accounting and Reporting (AFAR)
Problem E Problem H
On January 2, 2021, Mr. X entered into a franchise agreement with Mr. Y to sell their ABC sells franchise for initial fee of P500,000. This covers site selection, training,
computer products. The agreement provides for an initial franchise fee of P2,750,000, computer, and accounting software over the first 4 years. On April 30, 2021, DEF signed
payable as follows: P770,000 cash to be paid upon signing the contract, and the balance a franchise agreement, paying 10% down payment with balance due over 5 years
in six equal annual payments every December 31, starting December 31, 2021. Mr. Y evidenced by 10% interest bearing note. The agreement provides that ABC has the option
signs a non-interest bearing note for the balance. The franchisee’s credit rating indicates to purchase within 4 years to acquire DEF’s business. The collectability of the note is
that it can borrow 18% effective interest rate for similar type of loans. The agreement certain, refund period has expired and all the obligations were performed by ABC. In fact,
further provides that the franchisee must pay a continuing franchise fee equal to 6% of its ABC rendered service to the franchisee amounting to P200,000
monthly gross sales. On September 21, the franchisor completed the initial services
required in the contract at a costs of P1,347,500 and incurred indirect initial service costs 1. If it is certain that ABC will exercise the option to purchase the business, how much
of P168, 080. The franchisee commenced business operations in October 5, 2021. The will be recognized as franchise revenue in 2021?
gross sales reported to the franchisor are October sales, P1,380,000, November sales A. 0
P1,588,000 and December sales P1,040,000. The franchisor also incurred a total cost B. 160,000
related to continuing services in the amount of P113,000 (40% of which is indirect cost). C. 200,500
The first installment payment was made in due date. D. 500,000
1. Compute for the net income earned during the year 2021, assuming the ANSWER: A
collectability of the note is (1) reasonably assured; (2) not reasonably assured.
(use 2 decimal places for the PV factor). 2. If ABC exercised the option and acquired the franchise by paying P120,000 on the
A. 748,800 and 443,930 4th year, how much is the gain or loss on option to purchase the outlet?
B. 748,800 and 344,930 A. 120,000
C. 744,400 and 434,903 B. 162,500
D. 744,800 and 434,930 C. 180,000
ANSWER: D D. 350,000
ANSWER: C
Problem F
On July 1, 2021, X signed an agreement to operate as a franchisee of ABC printers for
an initial franchise fee of P12,000,000. The same date, X paid P4,000,000 and agreed to
pay the balance in four equal annual payments of P2,000,000 beginning July 1, 2021.
The down payment is not refundable and no future services are required of the franchisor.
X can borrow at 14% for a loan of this type. (use 2 decimal places for the PV factor).
1. X should record the acquisition costs of the franchise in July 1, 2021 at
A. 8,720,000
B. 9,820,000
C. 12,000,000
D. 13,525,000
ANSWER: B
Problem G
On March 1, 2021, ABC Co. entered into a franchise agreement with Mr. X a well-known
businessman. The franchise paid P300,000 and gave 200,000, 12% 5 year note payable
with interest due in March 1. On December 31, 2021, the franchisee decided not to open
the outlet despite the substantial performance made as of June 30, 2021. On December
31, 2021, ABC cancelled the franchisee’s note and refunded P180,000 that includes
interest earned on the note.
1. On December 31, 2021, how much will ABC recognize as the gain or loss from
repossessed franchise?
A. 120,000
B. 160,000
C. 200,500
D. 500,000
ANSWER: A
2. How much is the amount of franchise revenue on June 30, 2021?
A. 120,000
B. 160,000
C. 200,500
D. 500,000
ANSWER: D
Downloaded by Marielle Guerra_04 (gmarielle42@gmail.com) Downloaded by Marielle Guerra_04 (gmarielle42@gmail.com)
