Franchise Accounting
Quiz 3
1. On January 2, 2013, NAIKEE COMPANY signed an contract and undertakes to pay 50% of the balance
agreement to operate as a franchisee of CONBERSE upon substantial performance of the initial services
PRODUCTS, INC., for an initial franchisee fee of by the franchisor and the balance one year after. The
P12,500,000 for 10 years. Of this amount, franchisor is able to provide substantially all of the
P2,500,000 was paid when the agreement was initial services as of June 10 at a total cost of
signed and the balance payable in four annual P62,500. During the year, GREEN CABBIES’S sales
payments beginning on December 30, 2013. NAIKEE amounted to P3,750,000.
signed a non-interest bearing note for the balance. 3. How much franchise revenue is recognized by the
franchisor upon signing of the contract?
NAIKEE’S rating indicates that it can borrow money 4. How much franchise revenue must appear on the
at 24% for the loan of this type. Present value of an books of the franchisor for 2013?
annuity of 1 for 4 periods at 24% is 2.40.
5. On January 2, 2013, PATTER SERVICES signed an
Assume that substantial services amounting to agreement authorizing CUBICLE COMPANY to
P1,275,000 had already been rendered by CONBERSE operate as a franchisee over a 20-year period for an
PRODUCTS. Indirect franchise cost paid amounted to initial franchise fee of P625,000 received when the
P340,000. agreement was signed. CUBICLE commenced
operations on July 1, 2013, at which date all of the
Calculate the realized gross profit for 2013 initial services required of PATTER had been
assuming the collection of the note is reasonably performed. The agreement also provides that
assured. CUBICLE must pay annually to PATTER a continuing
franchise fee equal to 5% of the revenue from the
2. DRAGON RESTAURANT sold a fast-food restaurant franchise. CUBICLE’S franchise revenue for 2013 was
franchise to TWIN CORPORATION. The sale P1,000,000.
agreement signed on January 2, 2013 called for a
P75,000 down payment plus two P25,000 annual
payments representing the value of initial franchise For the year ended December 31, 2013, how much
services rendered by DRAGON. The present value of should PATTER record as revenue from franchise
two annual payments appropriately discounted at fees in respect of the CUBICLE franchise?
10% is P43,387.50. In addition, the agreement
required the TWIN 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
DRAGON. The restaurant opened early in 2013, and
its sales for the year amounted to P625,000.