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251 views28 pages

PDFGallery 20231021 122959

AFAR

Uploaded by

MaryJoyBernales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 15 FRANCHISE OPERATIONS Introduction For more than three dec three decades, IAS 18 — Revenue, has been in use in recognizing differen types of revenue. This scouting standard considers different revenue recognition criteria for diferent types of Income received (¢.g., sale of goods, rendering of services, amd weiby ters Of nal os \ding interest, royalties, and dividends). Under this accounting standard, revenue from sale of goods is primarily based on te aster f risks and rewards of ownership to the buyer. In january 2018. IAS 18 was superseded by IFRS 15 ~ Revenue from Contracts with Customers, which provides a standardized five -step model to Fecognize all types of customer contracts, FRANCHISE ACCOUNTING F : cally provides that franchise is included among the licenses re. Franchise is either a privilege, granted by government Perty- onopoly or permitting the use of public properties, His ' a ronepject to regulation, known a franchise berween the a private 60 r idual; ot a privilege, often exclusive, rr cevnufactuer, © use the entity's trade name and elle 4g onsjcts. within a certain period within & specified territory, known as 4 cts ievae company and another company OF aM individual. A party eee rights related 10 & franchise is ‘alled the Franchisor; and the to operate the franchised entity for ® fee is called the Franchisee. party t FRANCHISE REVENUE o ly of initial and subsequent servi chise revenue may Cover the suppl Franchise Tew other intangible assets ‘Accordingly, franchise tes ae recogize 6 equipmen iy basis that reflects Be ‘purpose for which the fees were revenue ‘charged. IFRS fares nad Silat) ess ak ere ACCOUNTING FOR SMALL AND MEDIUM-SIZED ENTITIES (SME ‘phe JERS/PERS for SMEs, Section 23, Revenue, states that franchise fees may cover te mophy Of initial and subsequent services, equipment and other intangible assets. eS aly, franchise fees are recognized as revenue on & basis that reflects pose for which the fees were charged. The following recognition are appropriate: * The franchisor recognizes the fair value of the assets sold items are delivered or title passes. ‘as revenue when the E art of the initial fee or a Fees for the provisions of continuing services, whether P: Separate fee, are recognized as revenue asthe services are rendered. When the separate fee does not cover the cost of continuing services together with @ reasonable profit, part ofthe initial fee, sufficient to cover the cost of continu services and to provide a reasonable profit on those services, 18 deferred and recognized as revenue as the services are rendered. isor to supply equipment, The franchise agreement may provide for the franchi han that charged to others inventories, or other tangible assets, at a price lower t or a price that does not provide a reasonable profit on those sales, in which case, part of the initial fee, sufficient to cover estimated costs in excess of that price and to provide a reasonable profit on those sales, is deferred and accounted for as an adjustment of the selling price when the franchisee purchases the equipment or supplies. The balance of the initial fee is recognized as revente 1 performance of al the initial services and other obligations required of the or has been substantially performed. | services and other obligations under an area franchise agreement may ~ depend on the number of individual outlets established in the area. In this case, fees attributable to the initial services are recognized as revenue in the to the number of outlets for which the initial services have been proportion substantially performed. ‘ectible over an extended period and there is a significant Il be collected in full, the fee is recognized as cash If the initial fee is coll uncertainty that it wil installments are received. harged for the use of continuing rights granted by the agreement, or for Fees charg ‘ded during the period of the agreement, are recognized as other services provi tae pe asthe services are provided orth rights used. TOA 18-8 (Adapteay the Farranchise agreement granis the franchisor an option to purchase franchise's by ised. When tusiness. It is probable that the onion = 0 A ‘ecording the initial franchise fee, the franchisor shou n % Record the entire initial franchise fee as a deferred paring reduce the franchisor’s investment in the purchase outlet option is exercised which will Record the entire initial franchise fee as unearned a reduce the amount of cash paid when the option is re table to the Record the option of the initial franchise fee which is at a bargain purchase option as a reduction of the future amount from the franchisi d. None of these. MULTIPLE CHOICE - PROB. 15-1 (Adapted) promises to gr er tity enters into a contract wit fhe right to use the france ance at provides te SOSCED 2a, The entity also p trade name and sell the entity" PT to provide the equipment necessary t0 PET for granting the license, the entity Tecehe customer’ monthly sales. Assume the fixed COST TY the customer's P1,500,000 payable when the equipment is havin for the month is P4,000,000. How wou! performance obligation/s? a. Equipment P1.5m, Franchise license b. Equipment PI.Sm, Franchise license P ¢. Franchise license P1.7m 4. Franchise license P200,000 id the transaction prict P4m 200,000 PROB. 15-2 (Adapted) Hungry Jacks Inc. granted a franchise rights to Burger Machine for an initial franchise fee of P1,800,000, with P520,000 paid when the agreement is signed Gn January 1, 2020, The balance shall be paid in four annual installments withil present value of P1,014,000 discounted at 10%. The franchise agreemetl stipulates that the franchisee has the right to purchase P80,000 worth of kitehem equipment and supplies for P60,000. Por of the initial franchise fee il designated for advertising to be provided by Hungry Jacks for the next five yeatl in the amount of P1,500 per month, Collectibility of the payments is reasonabifl assured and the franchisor has performed all the initial services required om times What is the journal entry to recognize revenue from franchise fee when the agreement is signed? Cash Notes receivable Uneamed franchise fee Revenue from franchise fee 520,000 280,000 356,000 1S Franchise ae b. Cash 20,000 | Notes receivable ies | ‘Uncamed interest income Lome 266,000 & neamed franchise fee 110,000 ; ce. calkt¥EIe fom franchise fee 1,424,000 t ne receivable , ‘evenue from fr aah VEME om franchise fee 1,800,000 Notes receivable . eared revenue from franchise fee 1,800,000 PROB. 15-3 (Adapted) On January 1 as a franchise: 20, Macas Inc. signed an agreement granting Me Co. to operate tee for an initial franchise fee of P3,000,000. At that date, an amount Of 1,000,000 was paid and the balance is payable in five annual payments beginning January 1, 2021. The present value of the annual payments at 11% is P1.043,300. The agreement provides that the down payment is non-refundable. On April 1. 2020 Mc Co. commences its operations and all services related to franchise rights required of the franchisor has been substantially performed. In addition to the franchise rights, Macas shall provide a year long training services beginning on the signing date, These services have a value of P120,000. 1. What is the journal entry to be recorded on January 1, 2020 (date of signing reement)’ a 1,000,000 Notes receivable 2,000,000 Unearned franchise fee 120,000 Revenue from franchise fee 2,880,000 b. Cash 1,000,000 Notes receivable 2,000,000 Unearned interest income 956,700 Revenue from franchise fee 2,083,300 ¢. Cash 1,000,000 "Notes receivable 2,000,000 Unearned interest income 956,700 Uneamed service revenue - training 120,000 Unearned franchise revenue 1,923,300 ee ee eee PROB. 15-6 (Adapted) On November 1, 2020, # franchisee bought a franchise from Max rae for sales price of P5,000,000 to sell Max ‘Turkey's products for a peri ae rece Theirragreement provides that P500,000 will be paid in advance and the balan in S equal annual installments, evidenced by 2 9% promises) nate; and Max Turkey will be responsible in making the feasibility study of the project and six sate taining of the franchisee’s staff and employees. The present value factors for the 9% rate follow: Present value of PI for 5 periods 0.650 Present value of an annuity of PI for 5 periods 3.890 Present value of an annuity of PI for 5 periods (in advance) 4.240 ‘Assuming collection of the note is reasonably assured, what is the amount of franchise revenue should Max Turkey recognize for the year ended December 31, 20207 a 0 b. 1,085,000 ¢. 4,001,000 d. 4,316,000 PROB. 15-7 (AICPA) Fish Ball Co. charges P90,000 for a franchise, with P18,000 paid when th Agreement is signed and the balance in four annual payments.‘The present value of the annual payments, discounted at 9% is PS8,315. The franchisee has the Tight to purchase P20,000 of equipment for P16,000. If collectibility of the payments is reasonably assured and substantial performance by Fish Ball has occurred, what is the amount of re fr ere venue from franchise fee that should be a b. c 4. 90,000 ver 10,000 uni : eee: Selling price oh pas of IW materials tothe franchisee with stand-alone oT a = franchisee to use the entity tradename for a period of 10 years 'g January 1. 2020 with stand-alone selling price of P50,000. On 4 As pores 2020, the entity completed the construction of the franchisee’s stall. materials to ior 31, 2020, the entity was able to deliver 3,000 units of raw se \e franchisee. For the year ended December 31, 2020, the franchisee Teported sales revenue amounting to P100,000. ‘The entity determin es that the i te and distinct from one another. performance obligations are separa 4. What is the amount of nonrefundable upfront fee to be allocated to the construction of the franchisee’s stall? a. 200,000 b. 160,000 d. 120,000 b. What is the amount of revenue to be recognized in relation to the use of delivery of raw materials for the year ended December 31, 2020? 2 75,000 b. 200,000 000 d. 100,000 ¢. What is the amount of revenue to be recognized in relation to the use of tradename for the year ended December 31, 2020? entity’s a 5,000 b. 4,000 c. 50,000 4. 10,000 4. What is the total revenue to be recognized by the entity for the year ‘ended December 31, 2020? a, 29,000 pb. 220,000 c. 285,000 d. 224,000 15— Franchise franchisee. The i franchise agreement 10 & Soniact provi rt ott) Fetal ay an intial franchise fe of F000 and vee the ftes equivalent to 8% oF HF sales of : ong : ed ‘on January 1, 2020, te franchisee pai down ete 7200.00, 13 issued therest bearing note for the balance " ielainets tag Docent 31,2020. The note Has present value of P240,183 with effective interest ‘As of June 30, 2020, the entity franchise at a cost of P352,146. Asi of P22,009. rate of 12%. mance obligation of the ity incurred indirect cost completed the perforn de from that, the enti 2020 and reported sales revenue july 1 2020. The franchisee The franchisee started operation on J ded December 31 amounting to P50,000 for the year end paid the first installment on its due date bly assured, what is the a. Ifthe collection of the note receivable is reaso year ended December 03s profit to be recognized by the entity for t 31, 2020 in relation to the initial franchise fe 66,028 44014 22,009 88,037 If the collection of the bi note receivable is re: f is reasonably net = to be reported by the e ‘ assured, what » iat is the ity for the year ended December 31 98,850 94,850 70,028 4. a 60,028 b. $4,236 ¢. 56,009 a. 45,037 easonably a If the collection of the note receivable is not reasonably sured, what is 1e year ended December the net income to be reported by the entity for the year en 31, 2020? a 62, b. 64, c 65,049 d. 61,037 Franchise TOA 15.5 SuRgested answer (a 4, 's revenue when earned and receivable from the cone Sranchisee ‘ontinuin and boca anchise foes shall be me rece’ franchise fee shat reported as revenue asthe fees are earned able from the franchisee. Cost relating 10 continuing be expensed asincured. TOA 15-6 Sy ‘Szested answer (d) When performance obligations are satisfied si Step 5 of th the enti cig revenue model provides that revenive is recognized when or as satisfies performance obligations. TOA 15-7 Suggeste: 15-7 Suggested answer (b)Record portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee subsequently makes the bargain purchases. The franchise agreement may provide for the franchisor to supply equipment, inventories, or other tangible assets, at a price lower than that charged to others or a price that does not provide a reasonable profit on those sales, in which case, part of the initial fee, sufficient to cover estimated costs in excess of that price and to provide a reasonable profit on those sales, is deferred and accounted for as an adjustment of the selling price when the franchisee purchases the equipment or supplies. (See: Bargain purchase option section in this chapter.) TOA 15-8 Suggested answer (a) thisor will acquire i » option is given it is probable that the franc If atthe tee re nial franchise fee shall be deferred as revenue, the franchisee s OWNS" ercised, the deferred amount shall reduce her option ; the fr a ie Investment inthe oulet purchased. (See Option to Purchase ranchisc Franchise Cutler section in ths chapter.) \ At the date ise fox’ js'8tM& the uncanny roe for interest, ther the allocated amount of the initial Purchase option, and advertising are PROB. 15.3 Amount 00, "SS eae of; ~ 1,000,000) 2,000,000 ue o — Uneamed interest inane aera 56.10 1. Suggested answer (c) 1,000,000 Teceivable 2,000,000 neamed interest income ¢ from franchise fee (3m — 1,076,700) |__| 1,923,300} e on future ts The initial franchise fee is allocated to interest revenue on future installment and training services 2. Suggested answer (a) [ Unearned franchise | Uneamned service revenue (120,000 x 3/12) _ TaEeMA Franchise revenue — aio ning _ Service chisor has been squired of the franchisor S -anchise rights required J see Services related 1 ain "sq70 (date of commencement of OPT 3 ily performed on Apri a ee partially pe : I ing. re raining services hisor provides one ear of traini ‘hisor S The fran date. Amount duc resent Uneame 90,000 18,000, al Be " a Of annual Payments st ‘crest income ast 13,685, — franchise fee ~€ss: Uneamed interest income = ‘nearned franchise fee (2 ae Venue franchise fee fee (20,000 - 16,000) 4,000 _ 17.685 72315 Again, £ain, initial franchise instaliments and baron Le 8 allocated to interest revenue for the future the selling pr earsain Purchase option that is accounted as adjustment of & Price of the equipment purchased. PROB. 15-8 Suggested answer (c) P25,000 Payment made upon signing of contract (P100,000/ 5) P 20,000 franchise fee (1% x P500,000) 000 fee for the first ye P 25,000, ranchise companies derive their income from one or both of the following rces- 1) Initial franchise fee, and 2.) Continuing franchise fee. Given | the franchising agreement may be cancelled should the operation of the orove to be unprofitable with the P100,000 franchise fee is waived, 1 when or as the entity satisfies a performance srvices required of the franchisor were not ‘may be recognized as revenue. In this case, the se hus, the entire amount collected identified; th ROB. 15-9 Suggested answer (©) 610,000 P. 5-9 Sugg 630,000 21 x P30,000) r ‘a al franchise fee (2° = ig it in additional paym = will d Net unrealized frat inchise fee

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