Problems

1. Block Co. had the following consignment transactions during December 2020:

Inventory shipped on consignment to 66,000

Star Co.
Freight paid by Block 1,300
Inventory received on consignment from 77,000
Moon Co.
Freight paid by Moon 1,400

No sales of consigned goods were made through December 31, 2020. Block Co’s December 31, 2020
balance sheet should include consigned inventory at – 67,300

2. Each of Potter Pie Co.’s 21 new franchisee contracted to pay an initial franchise fee of P30,000.
By December 31, 2020, each franchisee had paid a non-refundable P10,000 fee and signed a
note to pay P10,000 principal plus the market rate of interest on December 31, 2021 and
December 31, 2022. Experience indicates that one franchise will default on the additional
payments. Services for the initial franchise fee will be performed in 2021. What amount of net
unearned franchise fees would Potter report at December 31, 2020? Note: Follow the proper
way of writing figures: comma and no space in between (ex. P1,000,000). – 610,000

3. Kim Group of Companies charges an initial fee of P1,600,000 for a franchise, with P320,000 paid
when the agreement is signed and the balance in four annual payments. The present value of
the annual payments, discounted by 10% is P1,014,000. The franchisee has the right to purchase
P60,000 of kitchen equipment and supplies for P50,000. An additional part of the initial fee is for
advertising to be provided by Kim during the next five years. The value of the advertising is
P1,000 per month. Collectibility of the payments is reasonably assured and the company has
performed all the initial services required by the contract. When Kim prepares its financial
statements, the unearned franchise fee revenue to be reported is Note: Follow the proper way
of writing figures: comma and no space in between (ex. P1,000,000). – 70,000

4. Fish Ball Co. charges P90,000 for a franchise, with P18,000 paid when the agreement is signed
and the balance in four annual payments. The present value of the annual payments, discounted
at 9% is P58,315. The franchise has the right to purchase P20,000 of equipment for P16,000. If
collectability of the payments is reasonably assured and substantial performance by Fish Ball has
occurred, what is the amount of revenue from franchise free that should be recognized? –
72,315

5. Emu and You, a new fast food chain, sells exclusive franchises for P2,500,000 initial franchise
fee. For this fee, franchisees receive training, assistance on site selection, assistance during the
construction phase, and promotional considerations for the grand opening, including a visit by
Ernie Emu. There is also a P50,000 per month continuation fee for institutional advertising and
accounting services after the store is open for business. On March 20 of the current year, Emu
and You sold a franchise to I.M. Stuck for the standard fee. The franchisor received a 20% down
payment and a 10%, four-year note for the balance. On June 15, Stuck had his grand opening
 and Emu and You had met all requirements for performance obligations for the initial franchise
fee. On July 15, Emu and You received P50,000 for the continuing fee.

6. APC, Inc. consigned twelve 55” LED Television to TD’s Emporium. The televisions cost P35,000
each. The consignor paid P12,000 for the freight out. The consignee subsequently rendered an
account sales for five units sold at P55,000 each, and deducted the following items from the
selling price:

Commission (based on sales net of commissions) 10%

Marketing expense (based on commission) 20%
Delivery and installation (on each unit sold) 600
Requirement: Journal entries
 Sales Revenue of the consignor – 275,000
 Total consignor's charges
 Total consignee's charges.
 Total consignee's commission.
 Marketing expense.
 Total deductions in computing the consignor's gross profit.
 Consignor's Profit.
 Net remittance of the consignee.

7. Smith & Sons is a CPA firm that provides proprietary software to its clients. One of its software
packages sells for P150 and contains pre-programmed tutorials on basic accounting concepts.
Another product sells for P3,000 and contains Smith & Sons’ archive of accounting standards
and articles, which Smith & Sons updates on a weekly basis and downloads to archive users for
the two years following purchase of the product. The customer purchases both software
packages on June 1, 2020.
 The revenue that Smith & Sons should recognize for the year is
 The archive of accounting standards and articles is
 The software license for tutorials is

8. On December 31, 2020, Rice, Inc. authorized Graf to operate as a franchisee for an initial
franchise fee of P750,000 (cost of P550,000 is still payable). Of this amount, P300,000 was
received upon signing of the agreement and the balance, represented by a note, is due in three
annual payments of P150,000 each beginning December 31, 2021. The present value on
December 31, 2020 of the three annual payments appropriately discounted is P360,000.
According to the agreement, the non-refundable down payment represents a fair measure of
the services already performed by Rice; however, substantial future services are required of
Rice. Collectability of the note is reasonably certain. In preparing the December 31, 2020 journal
entry/ies,
EXCEL – JOURNAL ENTRIES
9. On November 1, 2020, a franchisee bought a franchise from Max Turkey for a sales price of
P5,000,000 to sell Max Turkey’s products for a period of 20 years. Their agreement provides that
P500,000 will be paid in advance and the balance in 5 equal annual installments, evidenced by a
9% promissory note; and Max Turkey will be responsible in making the feasibility study of the
project and six months training of the franchisee’s staff and employees. The present value
factors for the 9% rate follow: Present value of P1 for 5 periods 0.650 Present value of an
annuity of P1 for 5 periods 3.890 Present value of an annuity of P1 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, 2020? - 0

10. The Odessa Appliance Center sells goods to a third party via an agent. During 2020, Odessa
supplies the agent with goods with a sales value of P200,000. The agent charges a commission
of 15%. Under the revenue recognition principle, how much revenue should each of Odessa and
the agent recognize in profit or loss for 2019? Odessa-P200,000; Agent-P30,000

11. Kim Group of Companies charges an initial fee of P1,600,000 for a franchise, with P320,000 paid
when the agreement is signed and the balance in four annual payments. The present value of
the annual payments, discounted by 10% is P1,014,000. The franchisee has the right to purchase
P60,000 of kitchen equipment and supplies for P50,000. An additional part of the initial fee is for
advertising to be provided by Kim during the next five years. The value of the advertising is
P1,000 per month. Collectibility of the payments is reasonably assured and the company has
performed all the initial services required by the contract. When Kim Group of Companies
prepares its financial statements, the franchise fee revenue to be reported is Note: Follow the
proper way of writing figures: comma and no space in between (ex. P1,000,000).

12. Octagon Computers, Inc. sends computers to dealers on a consignment basis. The selling price
per unit is P25,000 and the dealer earns a 10% commission. The manufacturing cost of the
computers to Octagon Computers, Inc. is P15,000. Assume that in 2020, 100 units were sent on
consignment to Ace Logic, Co. in Dumaguete City. Octagon Computers, Inc. paid LBC P60,000 for
the delivery. Sixty of these units were sold for cash. On November 30, Octagon Computers, Inc.
advances 30% of the sales made by Ace Logic, Co. On December 31, 2020, remittance had been
made to Octagon Computer, Inc. for fifty units. Answer the following: Note: An answer can be
repeated.

13. On January 2, 2020, LMN Co. purchased a franchise with a useful life of 10 years for P800,000.
An additional franchise fee of 3% of franchise operation revenues must be paid each year to the
franchisor. Revenues from franchise operations amounted to P1,500,000 during 2020. In its
December 31, 2020 balance sheet, what amount should LMN report as an intangible asset-
franchise? Note: Follow the proper way of writing figures: comma and no space in between (ex.
P1,000,000). – 720,000
 14. On January 2, 2020, LMN Co. purchased a franchise with a useful life of 10 years for P800,000.
An additional franchise fee of 3% of franchise operation revenues must be paid each year to the
franchisor. Revenues from franchise operations amounted to P1,500,000 during 2020. In its
December 31, 2020 balance sheet, what amount should LMN report as an intangible asset-
franchise? Note: Follow the proper way of writing figures: comma and no space in between (ex.
P1,000,000). -1,750,000

15. On July 1, 2020, Hart Corp. signed an agreement to operate as a franchisee of Ace Printers for an
initial franchise fee of P1,200,000. On the same date, Hart Corp. paid P400,000 and agreed to
pay the balance in four equal annual installments of P200,000, beginning July 1, 2021. The
downpayment is not refundable and no future services are required of the franchisor. Hart can
borrow at 14% for a loan of this type. Present and future value factors are as follows:
Present value of P1 at 14% for 4 periods 0.59
Present value of an annuity of P1 at 14% for 4 periods 2.91
Future value of P1 at 14% for 4 periods 1.69
At what amount should Hart record the franchise at the date of acquisition? – 982,000

TRUE OR FALSE
 Options to purchase is a right of the franchisor to be exercise when there are violations of the
franchise contract of which it warrants the cancellation of the contract. -False
 Options to purchase is a right of the franchisor to be exercise when there are violations of the
franchise contract of which it warrants the cancellation of the contract. – FALSE
 Commingled revenue refers to a single initial franchise fee for franchise rights, initial services,
tangible property such as supplies and equipment. – TRUE
 Revenue for sales-based royalty payments should be recognized on the date the performance
obligation is satisfied. – FALSE
 Revenue for sales-based royalty payments should be recognized on the date payment is
received by the franchisor. – FALSE
 Revenue for sales-based royalty payments should be recognized on the date payment is
received by the franchisor. – TRUE
 In consignment, the consignor recognizes a transfer of title to the goods and revenue from the
sale only when the account sales notification from the consignee is received. – TRUE
 Continuing franchise fees should be recorded by the franchisor as revenue when earned and
receivable from the franchisee. – TRUE
 The initial franchise fee should not be capitalized as franchise. – FALSE
 For a franchise with an estimated useful life of 10 years, periodic payments to the franchisor
based on the franchisee’s revenues is expensed as incurred by the franchisee. – TRUE
 Continuing franchise fee is the consideration received by the franchisor for establishing the
franchise relationship and providing some initial services. – FALSE
 Goods on consignment should be included in the inventory of the consignor and of the
consignee. – FALSE
 In consignment sales, the consignor prepares an “account sales” which shows the sales,
expenses, and cash receipts. – FALSE
 The account to be used when it is probable that the franchisor will ultimately purchase the
outlet or is going to exercise the purchase options is the deferred franchise purchase option
liability. – TRUE
 If the franchisor has performed the required services, the initial franchise fee should be
recognized as unearned. – FALSE
 In accounting for sales on consignment, sales revenue and the related cost of goods sold should
be recognized by the consignor when the goods are shipped to the consignee. – FALSE
MCQ
 Occasionally, a franchise agreement grants the franchisee the right to make future bargain
purchases of equipment or supplies. When recording the initial franchise fee, the franchisor
should - Record a portion of the initial franchise fee as unearned revenue which will
increase the selling price when the franchisee subsequently makes the bargain purchases.
 If a franchise becomes worthless prior to the end of its estimated useful life, the
unamortized balance in the franchisee account should be written off as a/an - Impairment
loss
 All revenue for franchise companies is derived from - sale of initial franchise and continuing
fees
