CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
ADVANCED FINANCIAL ACCOUNTING AND REPORTING GERMAN and VALIX
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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Part II: Problem Solving:
Problem 1
On January 1, 2025, EFG Inc. entered into a franchise agreement with Entity H for an initial
franchise fee of P750,000 payable as follows: P250,000 down payment payable immediately and
two P250,000 annual payments evidenced by a non-interest bearing note, with the first payment due
on December 31, 2025. With an effective rate of 9%, the present value of the note is P439,750.
The following excerpts were taken from the franchise contract:
The franchise license is granted to Entity H for a term of 5 years. Entity H has the right to access
the license from the date of franchise agreement. The license has an observable stand-alone
selling price of P200,000.
EFG Inc. is to construct a food stall for Entity H. The food stall has no observable stand-alone
selling price but has an estimated cost of P300,000 and a margin of P100,000.
EFG Inc. must conduct training for the employees of Entity H.
It was determined that the three performance obligations were separate and distinct from one
another. By the end of the year, the food stall was 90% completed as to construction and the training
was 80% done.
1. Under IFRS 15, assume that there was no established stand-alone selling price for the
training of the employees, what is the total revenue from franchise fees recognized by the
franchisor for the year ended December 31, 2025?
A. 511,378
B. 471,800
C. 729,328
D. 689,750
2. Under IFRS 15, assume that the stand-alone selling price of the training of the employees
amounted to P100,000 based on the adjusted market assessment approach, what is the
total revenue recognized by the franchisor for the year ended December 31, 2025?
A. 729,328
B. 472,972
C. 689,750
D. 512,550
Problem 2
On April 1, 2025, Entity A, a franchisor entered into a contract with a franchisee for the
establishment of a restaurant. The franchise agreement provides that the franchisee shall pay a non-
refundable franchise fee in the amount of P500,000 with P200,000 payable at the signing of contract
and the balance payable in four equal annual installments starting March 31, 2026. The franchisee
issued a non-interest bearing note with effective interest rate of 10%. The present value factor of an
ordinary annuity at 10% for 4 periods is 3.16987. Aside from that, the franchisee shall pay on-going
royalties equivalent to 5% of franchisee’s revenue for the year. As of April 1, 2025, Entity A
completed the performance obligation of the franchise at a cost of P250,000. Indirect cost of
P35,000 was also incurred. The franchisee reported P200,000 sales revenue for year 2025.
Under IFRS 15, what is the net income for the year ended December 31, 2025?
A. 180,571
B. 186,514
C. 162,740
D. 215,571
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Problem 3
On July 1, 2025, Entity A, a franchisor, entered into a contract with a franchisee for the operation of
a restaurant. The franchise agreement provides that the franchisee shall pay a non-refundable
upfront franchise fee amounting to P2,500,000 with P500,000 payable at the signing of contract and
the balance payable in five equal semi-annual installments every December 31 and June 30. The
franchisee issued a non-interest bearing note with effective interest rate of 10%. The present value
of the note receivable is P1,731,791. The franchise agreement further provides for the payment of
on-going royalties equivalent to 3% based on franchisee’s sales revenue.
During 2025, Entity A has substantially performed the direct cost of services required by the
franchise in the amount of P1,785,433. In the same year, Entity A has also incurred indirect cost
amounting to P10,000. For the year 2025, the franchisee has reported sales revenue amounting to
P400,000.
1. Assume the collectability of the note is reasonably assured, what is the net income
recognized by Entity A for the year ended December 31, 2025?
A. 621,537
B. 534,948
C. 528,948
D. 559,948
2. Assume the collectability of the note is not reasonably assured, what is the net income
recognized by Entity A for the year ended December 31, 2025?
A. 188,590
B. 268,590
C. 251,272
D. 337,861
END
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