CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN
FRANCHISE ACCOUNTING
Part I: Theory of Accounts
1. Under IFRS 15, an asset is transferred to the customer when customer obtains
A. satisfaction
B. possession
C. control
D. recognition
2. When shall an entity recognize revenue from contracts with customers?
A. When it is probable that future economic benefits will flow to the entity and the revenue can be
measured reliably.
B. When or as the entity satisfies the performance obligation.
C. When the entity collected the cash from the customers.
D. When the entity and the customers sign the contracts.
3. What is the accounting treatment of the transaction price when a contract with a customer has
multiple performance obligations?
A. The transaction price shall be recognized as revenue of the most important performance
obligation.
B. The transaction price shall be allocated equally to the different performance obligations.
C. The transaction price shall be allocated to the different performance obligations by reference to
their relative standalone selling prices.
D. The transaction price shall be recognized as revenue only at the end of completion of all
performance obligations.
4. When the stand-alone selling price is not directly observable, an estimate of the stand-alone selling
price is made through maximizing the use of observable inputs. Which of the following is not a
possible estimation approach?
A. Residual approach
B. Adjustment market assessment approach
C. Net realizable value approach
D. Expected cost plus a margin approach
5. Under IFRS 15, a good or service that is promised to a customer is distinct if
A. the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer
B. the entity's promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract
C. Both A and B
D. Neither A nor B
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Page 2
Part II: Problem Solving
Problem 1
On January 1, 2022, Entity A granted a franchise right to franchisee for the operation of selling
automobile parts. Entity A also granted the franchisee the right to access its trade-name for a period of 0
10
years. The franchisee is required to pay an upfront non-refundable initial franchise fee of P20,000,000
and a continuing franchise fee of 10% of the annual sales. It is the obligation of Entity A to construct the
franchise stall and to deliver 10,000 units of automobile parts to the franchisee.
Assume the following INDEPENDENT cases: VASP AHOC
4m 10hm
CASE 1:
3h 7Th
Stand-alone selling prices 2.5M
1. Trade-name
2. Construction of the stall
3. Delivery of 10,000 units of automobile parts
P4,000,000
P3,000,000
Not directly observable
¥ Tom
After careful evaluation in the market, the price that a customer is willing to pay for the delivery of
10,000 units of materials was P1,000,000 under the adjusted market assessment approach.
On October 1, 2022, Entity already finished the construction of the stall and as of December 31, 2022,
Entity A only delivered 2,000 units of automobile parts. The franchisee reported sales revenue on
December 31, 2022 in the amount of P4,000,000.
1. Under IFRS 15, what is the revenue recognized pertaining to the delivery of automobile parts?
A. 2,500,000
B. 312,500 7.5M ✗ 2/10 =
5001'
C. 0
D. 500,000
-
2. Under IFRS 15, what is the total revenue from initial franchise fee?
A. 9,000,000 7h
B. 9,400,000 TN 10M / Ioyrj =
=¥⑤ʰ
C. 11,000,000
stall It
D. 11,400,000
a. + ✗ %
part
CASE 2:
Stand-alone selling prices
1. Trade-name Not directly observable
2. Construction of the stall Not directly observable
3. Delivery of 10,000 units of automobile parts P4,000,000
The stall had an estimated cost of P4,000,000 with a margin of P6,000,000. Since it is the first time for
Entity A to grant access of its trade-name, Entity A has not yet established a price for that service.
On October 1, 2022, Entity already finished the construction of the stall and as of December 31, 2022,
Entity A only delivered 3,500 units of automobile parts. The franchisee reported sales revenue on
December 31, 2022 in the amount of P1,500,000.
1. Under IFRS 15, what is the amount of transaction price allocated to the performance obligation
@
trade-name?
A. 6,000,000
residual kung
""
anolangnatira
"' "
son and
tradename
-
×
B. 10,000,000
-
#
C. 12,000,000 10m
D. 0 stall
-
20h
-
4m
parts 9107
Page 3
2. Under IFRS 15, what is the total revenue from initial franchise fee for the year end December
31, 2022? /
6M to 600k
]
=
A. 12,150,000 PM
B. 14,800,000 20M 10m ✗ tool =
/M
.
C. 12,000,000
D. 1,400,000 4m ✗
3¥ = 7.4m
3. Under IFRS 15, what is the total revenue for the year end December 31, 2022?
1I
A. 12,150,000
B. 14,950,000 km 1- 1501 ' -
.
C. 12,000,000
D. 1,550,000 ( IFK) ( CFF)
Problem 2
On January 1, 2022, an entity granted a franchise agreement to a franchisee. 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, 2022, the franchisee paid down payment of P200,000
and issued a 3-year 12% interest bearing note for the balance payable in three equal annual installments
starting December 31, 2022.
⑥
On June 30, 2022, the entity completed the performance obligation of the franchise at a cost of P300,000.
Be
Aside from that, the entity incurred indirect cost of P25,000. The franchisee started operation on July 1,
2022 and reported sales revenue amounting to P50,000 for the year ended December 31, 2022.
Under IFRS 15, what is the net income for the year end December 31, 2022?
A. 239,000 TOOK
B. 203,000 •
C.
D.
215,000
179,000 04%4 ask =ñ
44,4¥-1
-
ma
Problem 3
On January 1, 2022, Franchisee entered into a franchise agreement with Franchisor to market their
products. The agreement provides for an initial fee of P2,500,000 payable as follows: P700,000 to be paid
upon signing of the contract and the balance in 5 equal annual payments every end of the year starting
December 31, 2022. Franchisee signs 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 Franchisor completed
the initial services required in the contract at a cost of P858,024 and incurred indirect cost of P35,000.
The Franchisee commenced business operations on November 30, 2022. The gross sales reported to the
Franchisor were P360,000 for December, 2022.
-
1. Assume the collectibility of the note is reasonably assured, what is the net income for the year
ended, December 31, 2022?
↳
ROAD
A. 843,488
B. 1,024,496
C. 1,205,504
D. 1,240,504
2. Assume the collectibility of the note is not reasonably assured, what is the net income for the
year ended, December 31, 2022?
A.
B.
640,254
278,238
↳ RM
C. 459,246
D. 675,254
END
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