REVENUE RECOGNITION: FRANCHISE

1. Types of franchising arrangements include all of the following except

a. service sponsor-retailer. c. manufacturer-wholesaler.

b. wholesaler-service sponsor. d. wholesaler-retailer.

2. Some of the initial franchise fee may be allocated to

a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as revenue.
3. Continuing franchise fees should be recorded by the franchisor
a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.
4. Franchise fees are properly recognized as revenue
a. when received in cash.
b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.

5. On December 1, 2013, Dewyze Inc. authorized Cook to operate as a franchise for an initial
franchise fee of P3,400,000. P900,000 was received upon signing the contract, and the balance is
to be paid by a non-interest bearing note, due in five equal annual installments beginning December
31, 2014. Prevailing market rate is 12%. PV factor is 3.60478. The down payment is nonrefundable
and it represents a fair measure of the services already performed by Dewyze, however, with
regards to the balance, substantial future services are still required. How much is the deferred
franchise revenue to be recognized as of December 31, 2013?

a. P1,802,390 c. P2,500,000
b. P2,702,390 d. P1,518,677

6. On January 2, 2009, SD Company signed an agreement to operate as a franchisee of TQ Products,

inc. for an initial franchise fee of P937,500 for 7 years. Of this amount, P175,000 was paid when the
agreement was signed and the balance payable in four annual payments beginning on December 31,
2009. SD signed a non-interest bearing note for the balance. SD’s rating indicates that he can borrow
money at 16% for the loan of this type. Assume that substantial services amounting to P283,500 had
already been rendered by TQ Products and that additional indirect franchise cost of P25,500 was also
incurred. PV factor is [Link] the collection of the note is not reasonably assured, the net income for the
year ended December 31, 2009 is

a. P313,435 c. P228,035
b. P168,135 d. P253,535
 7. M.A. Sarap Restaurant sold a fastfood restaurant franchise to M. [Link] Corporation. The sale
agreement signed on January 2, 2010 called for a P80,000 down payment plus two P10,000 annual
payments representing the value of initial franchise services rendered by [Link]. The present
value of two annual payments appropriately discounted at 10% is P17,355. In addition, the agreement
required the franchisee to pay 5% of its gross revenues to the franchisor; this was deemed sufficient
to cover the cost and provide a reasonable profit margin on continuing franchise services to be
performed by [Link]. The restaurant opened early in 2010 and its sales for the year amounted to
P500,000. 5. [Link] Restaurant's 2010 total revenue from the franchisee will be

a. P 30,000 c. P 47,355
b. P 72.335 d. P 122,355

8. On November 31, 2010, Napisa Inc. signed an agreement authorizing Alonzo company to operate as
a franchisee for an initial franchise fee of P50,000. Of this amount, P20,000 was received upon
signing of the agreement and the balance is due in three annual payments of P10,000 each beginning
December 31, 2011. The agreement provides that the down payment (representing a fair measure of
the services already performed by Napisa, Inc.) is not refundable and substantial services are
required of Napiza. Alonzo Company's credit rating is such that collection of the note is reasonably
assured. The present value at December 31, 2010 of the three annual payments discounted at 14%
(the implicit rate for a loan of this type) is P23,220. 4. On Dec. 31, 2010, Alonzo Company should
record unearned franchise fees of:

a. P23,220 c. P30,000
b. P43,220 d. P50,000

9. Leann Enterprises, a franchisor, charges franchises a “franchise fee” of 500,000. Of this amount, a
nonrefundable 200,000 is paid upon the signing of the contract with the balance payable in three
equal installments after each year thereafter starting 2017. Leann will assist in locating a suitable
business site, conduct a market study, oversee the construction of facilities, and provide initial
training for [Link] October 1, 2016, Leann entered into a franchising agreement to cover an
entirely new and untested area. By December 31, 2016, Leann had substantially completed and
rendered appropriate services at a total cost of 150,000 but, somehow, has raised some doubts on
the collectibility of the balance of the franchise fee. In its 2016 income statement, Leann Enterprises
should recognize profit of:

a. 350,000 c. 50,000
b. 200,000 d. 140,000

10. Jones, Inc. charges an initial franchise fee of 500,000 for the right to operate as a franchise of Jones.
Of this amount, 100,000 is payable when the agreement was signed and the balance is payable in a
noninterest bearing note in five annual payments of 80,000 each. In return for the initial franchise fee,
the franchisor will help locate the site, negotiate the lease or purchase of the site, supervise the
construction activity, and provide the bookkeeping services. The credit rating of the franchisee
indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual
receipts of 80,000 each discounted at 8% is 319,416.80. The discount represents the interest revenue
to be accrued by the franchisor over the payment [Link] the probability of refunding the initial
franchise fee is extremely low, the amount of future services to be provided to the franchisee is
minimal, collectibility of the note is reasonably assured andsubstantial performance has occurred:The
unearned franchise fees would be:
 a. 0 c. 419,416.80
b. 100,000 d. 500,000.00

REVENUE RECOGNITION: CONSIGNMENT SALES

1. Revenue is recognized by the consignor when the

a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.

2. Goods on consignment should be included in the inventory of:

a. the consignor but not the consignee
b. both the consignor and the consignee
c. the consignee but not the consignor
d. neither the consignor nor the consignee

3. In accounting for sales on consignment, sales revenue and related cost of goods sold should
be recognized by the:
a. Consignor when the goods are shipped to the consignee
b. Consignee when the goods are shipped to the third party
c. Consignor when notification is received the consignee has sold the goods.
d. Consignee when cash is received from the customer

Use the following information for questions 4 and 5

On May 1, 2010, TV Inc. consigned 80 TVs to Ed's TV. The TVs cost P270. Freight on the shipment paid by
Ed’s TV was P600. On July 10, TV Inc. received an account sales and P12,900 from Ed's TV. Thirty TVs
had been sold and the following expenses were deducted:
Freight P600
Commission (20% of sales price) ?
Advertising 390
Delivery 210

[Link] total sales price of the TVs sold by Ed's TV was

a. P15,375. c. P16,388
b. P16,125. d. .P17,625.

[Link] inventory of TVs will be reported on whose balance sheet and at what amount?

Balance Sheet of Amount of Inventory

a. TV Inc. P13,875
b. TV Inc. P13,500
c. Ed's TV P13,875
d. Ed's TV P13,500

The CMC Corporation delivered 150 bath water heaters to COC Company on consignment. These water
heaters cost 900 each and is advertised to sell at P 1,500 each. The consignee is to be allowed a
commission of 15% of the selling price. The agreement for the consignment stated that CMC Corp. would
draw a sight draft on the consignee for 60% of the cost of the water heaters and the advance shall be
recovered periodically by monthly deductions ( in proportion to units sold) from the remittances which
accompany the account sales. All expenses of the consignee are to be deducted monthly as incurred.
The consignee rendered an account sales at the end of first month, show among others, the following
information:
Advertising P 2,250
Delivery expense 1,125
Commission 3,375

6. How many units were sold by COC Company during the first month:

a. 15 c. 25
b. 20 d. 30

7. How much is the amount remitted by COC Company to CMC Corp for the first month

a. P 22,500 c. P 7,650
b. P 15,750 d. P 6,750

8. The consignment profit(loss) of CMC Corp is

a. P 2,250 c. P 5,625
b. P 3,375 d. P 9,000

The CC manufacturing delivered 10 DVD players to CLTV Company on consignment. These DVP player
cost P 3,000 and each are to be sold at P 5,000. The CC Manufacturiing Co, paid shipment cost of P 2,500.

CLTV Co. submitted an accounting sales that it had returned one unit and was remitting P 21,900. This
amount represents the total amount due to CC Manufacturing Co. after deducting the following from the
selling price of the DVDC player sold:
Commission 20% of selling price
Advertising P 1,000
Delivery and installation P 600
Cartage on consigned goods P 500

9. The profit (loss) on consignment realized by CC Manufacturing company is:

a. P 2,300 c. (2,550)
b. P 2,480 d. None of the choices

10. The cost of inventory in the hands of CLTV Company is:

a. P 10,080 c. P 10,200
b. P 10,150 d. None of the choices