Problem 1
On January 1, 2020 HANZO CORP. entered into a franchise agreement with MOBA INC. to market their
products. The agreement provides for an initial fee of P12,500,000 payable as follows: P3,500,000 to be
paid upon signing of the contract and the balance in five annual payments every end of this year starting
December 31, 2020. 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 franchiser completed the initial services
required in the contract at a cost of P4,290,120 and incurred indirect cost of P175,000. The franchisee
commenced business operations on November 30, 2020. The gross sales reported to the franchiser were
P1,800,000 on December 31, 2020, The first installment payment was made in due date. (Round gross
profit rate in 2 decimal places)
REQUIREMENTS: Under the following assumptions: (1) Compute for the total revenue for the year 2020;
(2) How much is the net income for the year ended, December 31, 2020?
a. Assume that HANZO signed an interest bearing note for the remaining balance of initial franchise
fee and the collectability of the note is reasonably assured. (The interest rate is 15%)
b. Assume that HANZO signed an interest bearing note for the remaining balance of initial franchise
fee and the collectability of the note is NOT reasonably assured. (The interest rate is 15%)
c. Assume that HANZO signed non-interest bearing note for the remaining balance of initial
franchise fee and the collectability of the note is reasonably assured. (The effective interest rate is
15%)
d. Assume that HANZO signed non-interest bearing note for the remaining balance of initial
franchise fee and the collectability of the note is NOT reasonably assured. (The effective interest
rate is 15%)
e. Assume that HANZO signed an interest bearing note for the remaining balance of initial franchise
fee and did not substantially transferred control over the asset with a license period is 10 years.
Problem 2
LOLITA CORP. sold a fast food restaurant franchise to TANK CORP. The signed agreement on January 1,
2020 provides for the following stipulations:
• A P100,000 down payment shall be paid representing the fair value of initial services provided by the
franchisor.
• The balance is to paid by four annual payments of P50,000 evidence by a non-interest bearing note
signed by the franchisee. The credit rating of the franchisee indicates that it can borrow money at a 10%
interest for a loan of this type. (Round-off present value factors in 2 decimal places.)
• The agreement further provides that the franchisee is to pay ongoing payment for royalties at 5% of its
gross revenues. The restaurant opened early this year and its sales for the year amounted to P50,000.
The franchisor incurred direct costs and indirect costs amounting to P63,400 and P15,000, respectively.
REQUIREMENTS: Using the following assumptions: (1) How much is LOLITA’s 2020 total franchise
revenue? (2) Compute for the company’s net income for the year 2020.
a. Assuming the collectability of the note is reasonably assured.
b. Assuming the collectability of the note is not reasonably assured.
c. Assuming that the performance obligation has yet performed during the year and the collectability
of the note is reasonably assured.
