CHAPTER 8 ACCOUNTING FOR FRANCHISE OPERATIONS—
FRANCHISOR
Problem 3
Requirements:
a. Determine the following
i. The performance obligations in the contract and how these will be satisfied.
The promises to grant the franchise license and to transfer the equipment are distinct. The customer can
benefit from each promise on their own or together with other resources that are readily available and
the franchise license and equipment are separately identifiable.
The customary business practice to undertake activities such as analyzing the customer’s changing
preferences and implementing product improvements, pricing strategies, marketing campaigns and
operational efficiencies to support the franchise name are supporting activities and not performance
obligations. These do not directly transfer goods or services to the franchise and are rather part of
Native Co.’s promise to grant the license, and in effect, changes the intellectual property to which the
franchisee has rights.
There are therefore two separate obligations in the contract, which is the Franchise license and the
Equipment. Since the license is distinct Native Co. determines if the franchisee has right to access or
right to use. And since Native Co. undertakes activities to support the franchise, the franchisee’s rights
can be expected to validly change. The customer therefore has right to access and thus the performance
obligation is satisfied over time.
Equipment on the other hand, has its control transferred upon delivery and is therefore satisfied at a
point in time.
ii. The transaction price
The transaction price includes a fixed consideration of P 450,000 and a variable consideration for the
sales-based royalty.
iii. How the transaction price is allocated
The P 450,000 upfront fee is allocated as follows:
P 150,000 to the equipment
P 300,000 balance to the franchise license
The 5% sales based royalty is allocated entirely to the franchise license
iv. How revenue will be recognized from the contract
The P 150,000 is recognized as revenue when the equipment is transferred to the franchisee
For the P 300,000, Native Co. applies the general principles to determine a measure of progress that
best depict its performance.
Because the contract provides the franchise with unlimited use of Native Co.’s intellectual property
for fixed term of 10 years an appropriate measure of progress may be time-based method. Native
Co. starts to amortize the P 300,000 on March 1,20x1 at which date the 10-year license period starts
to run.
Sales-based royalty is recognized as the sale occur
b. Journal entries in 20x1
Jan 1, 20x1 Cash 450,000
Contract liability 450,000
To record the receipt of initial franchise fee
Feb 1, 20x1 Contract liability 150,000
Revenue 150,000
To recognize revenue from the initial franchise fee
allocated to equipment
Dec 31, 20x1 Contract liability 25,000
Revenue 25,000
To recognize revenue from the initial franchise fee
allocated to the franchise license
Dec 31, 20x1 Cash 60,000
Revenue 60,000
To recognize revenue from the sales-based
royalty
Problem 5
a. What are the performance obligations in the contract and how are these satisfied? (Support
your answers by referring to specific statements, articles or sections in the contract).
The only performance obligation in the contract is the promise to grant a franchise license,
stated in article 1 of the franchise agreement. This obligation is distinct and is therefore
separately identifiable because the customer can benefit from the franchise license, together
with the other resources that are readily available (like the equipment, sign music and seasonal
graphics).
It is also stated in Article 2 of the agreement that the franchisee agrees to use the Mark and
Licensed Methods, as they may be changed, improved and further developed by the Franchisor
from time to time, in accordance with the terms and conditions. The Highlands Food Inc.
therefore has the right to access, and thus the performance is satisfied overtime.
b. How much is the transaction price and what are its components?
The transaction price includes a fixed consideration of 2,000,000 (the initial franchise fee) and a
variable consideration of 5% monthly royalty equal to its Gross Retail Sales (the continuing
franchise fee)
c. How is the transaction price allocated?
The fixed and variable considerations are allocated in the sole performance obligation of
granting the license.
d. How will the franchisor recognize revenue from the contract?
The P 2,000,000 is recognized over the 10-year license period using straight-line
method.
The sales-based royalty is recognized as the sales occur.
e. Provide the franchisor’s pro-forma journal entries on the following dates:
i. contract inception
July 24, 2017 Cash 2,000,000
Contract liability 2,000,000
To record the receipt of initial franchise fee
ii. acquisition of the signage by the franchisee
Dec 2017 Deferred contract cost (signage) Value not given
Cash Value not given
Cost of license (N/10yrs.) x 1/2
Deferred contract costs
iii. acquisition of equipment by the franchisee
Dec 2017 Deferred contract cost (equipment) Value not given
Cash Value not given
Cost of license
Deferred contract costs
iv. performance of initial services
NO ENTRY
v. opening date of the franchisee’s restaurant (assume this falls on the 1st day of the
month)
NO ENTRY
vi. end of the first month of the franchisee’s operations (assume the restaurant had gross
retail sales of P 800,000 for the month) – round-off centavos to two decimal places
Jan. 31, 2018 Contract liability 16,667
Revenue (2M/10) x 1/2 16,667
To recognize revenue from the initial fee
Jan. 31,2019 Cash 40,000
Revenue (800k x 5%) 40,000
To recognize revenue from the continuing fee
Problem 6
A. Apply “Steps 2 to 5”of PFRS 15 to identify the following:
I. The performance obligation(s) in the contract and how the performance
obligation(s) are satisfied.
The only performance obligation in the contract is the promise to grant the
franchise license.
The pre-opening activities associated with the franchise license are not performance
obligations because these does not directly transfer a good or service to the
customer. Rather these are part of the entity’s promise to grant the license.
The existence of a shared economic interest and regular advertising campaign
indicate that Plane Co. will continue to be involved with the Intellectual Property
(IP) thus; the customer has the right to access Plane Co.’s IP. Accordingly the
performance obligation is satisfied over time.
II. The transaction price and its components.
The transaction price includes a fixed consideration of 1,400,000 upfront fee and a
variable consideration of 5% of customer sales.
III. The allocation of the transaction price and its components.
Both fixed and variable considerations are allocated to the sale performance
obligation of granting license.
IV. The revenue from the contract.
The P 1,400,000 is recognized over the 7-year license period using the straight line
method. The sales-based royalty is recognized as the sales occur.
B. Provide all the necessary journal entries in 20x1.
Jan 1, 20x1 Cash 1,400,000
Contract liability 1,400,000
To record the receipt of initial franchise fee
Dec 31, 20x1 Contract liability 100,000
Revenue (1.4M7) 6/12 100,000
To recognize revenue from the initial franchise fee
allocated to the franchise license
Dec 31, 20x1 Cash 450,000
Revenue (9M*5%) 450,000
To recognize revenue from the sales-based
royalty
CHAPTER 9 CONSIGNMENT SALES
Problem 3
Bookstore Co.
a. Compute for the amounts to be presented in Publisher’s statement of profit or loss?
Cash 245,700
Commission expense (315,000*20%) 63,000
Withholding tax expense (315,000*2%) 6,300
Revenue 315,000
Cost of Goods Sold (322*700) 225,400
Inventory 225,400
b. How much is the ending inventory to be presented in Publisher’s statement of financial
position?
Publisher’s Co.
Beg. Inventory ( 300*1000) 300,000
Freight (22*1000) 22,000
Total 322.000
Less: Cost of Goods Sold (322*700) 225,400
Ending Inventory 96,000
Or simply: 322*300=96,000
c. How much income is recognized by Bookstore?
Commission Income 63,000
Add: Mark up income
(450*15%) =67.50*700 47,250
Total income 110,250
Problem 5
Requirement: Determine whether Allegretto is acting as a principal or as an agent using the guidance in
PFRS 15 and describe how Allegretto will recognize revenue from the contract.
Answer: Allegretto is acting as a principal because
a) Allegretto is the one primarily responsible for fulfilling the contracts. Airlines which are also
fulfilling obligations are only acting as an agent.
b) Allegretto co, has inventory risk because it pays for the ticket regardless of whether it will be
able to sell all.
c) Allegretto Co. has the discretion in establishing the selling price of the tickets
d) Allegretto Co.’s consideration is not in the form of commission.
e) Allegretto Co. has the credit risk for the amount receivable from the customer.
When the performance obligation is satisfied, Allegretto Co. recognize revenue at the gross amount of
the contract price negotiated with the customer.
Problem 6
1. Requirement: Determine whether Pizzicato is acting as a principal or as an agent using the
guidance in PFRS 15 and describe how Pizzicato will recognize revenue from the contract.
Pizzicato Co. is an agent because it does not control the good or service before it is provided to
customer. It is the restaurant that does. Pizzicato’s performance obligations is only to sell
vouchers to the requesting customer. When this is satisfied, Pizzicato recognizes 30% of the
voucher price, as the agreed commission. Indicators a to e of PFRS 15 are present.
2. Requirement: Determine whether Staccato is acting as a principal or as an agent using the
guidance in PFRS 15 and describe how Staccato will recognize revenue from the contract.
Staccato is a principal because
a) It is primarily responsible for fulfilling the contract. The manufacturer of the equipment
is only a subcontractor. Staccato is still responsible for ensuring that the equipment is
still in accordance with the customer’s specifications.
b) Staccato Co. has inventory risk because of its responsibility in correcting errors in
specifications.
c) Staccato Co. has the discretion in establishing the selling price negotiated with the
subcontractor and the customer.
d) Staccato Co.’s consideration is not in the form of a commission. Its profit is based on the
difference between the selling price negotiated with the subcontractor and the
customer.
e) Staccato Co. has credit risk for the amount receivable from the customer. This is
evidenced by the 30-day credit term Staccato gives to its customers.
