CHAPTER 15 MULTIPLE CHOICES

PROB. 15-1 (AICPA)

Which of the following should be expensed as incurred by the franchisee for a franchise with an
estimated useful life of 10 years?

a. Amount paid to the franchisor for the franchise

b. Periodic payments to a company, other than franchisor, for that company’s franchise
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise
d. Periodic payments to the franchisor based on the franchisee’s revenues

PROB. 15-2 (Adapted)

Northern Airline purchased airline gate rights at Newark International Airport for P2,000,000 with a legal
life of five years. However, Northern has the ability and right to extend the rights every ten years for an
indefinite period of time. Over what period of time should Northern amortize the gate rights?

a. 5 years
b. 15 years
c. 40 years
d. No amortization

PROB. 15-3 (Adapted)

If a franchise becomes worthless prior to the end of its estimated useful life, the unamortized balance in
the franchise account should be written off as a (an):

a. Prior period adjustment

b. Impairment loss
c. Expense in the current period
d. Change in estimate

PROB. 15-4 (AICPA)

Mark Co. bought a franchise from Fred Co. on January 1, 2009 for P204,000. An independent consulted
retained by Mark estimated that the remaining useful life of the franchise was 50 years. Its unamortized
cost on Fred’s books indefinitely. What amount should be amortized for the year ended December 31,
2009?

a. 5,100
b. 4,080
c. 4,000
d. 0

PROB. 15-5 (AICPA)

On January 2, 2009, Rafa Co. purchased a franchise with a useful life ten years or P50,000. An additional
franchise fee of 3% of franchise operation revenues must be paid each year to the franchisor. Revenues
from franchise operations amounted to P400,000 during 2009. In its December 31, 2009 balance sheet,
what amount should Rafa report as an intangible asset – franchise?

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 a. 33,000
b. 43,800
c. 45,000
d. 50,000

PROB. 15-6 (AICPA)

On January 1, 2010, Browns Co. entered into a franchise agreement with a company allowing that
company to do business under Browns’ name, Browns had performed substantially all required services
by January 1, 2010, and the franchisee paid the initial franchise fee of P70,000 in full on that date. The
franchise agreement specifies that the franchisee must pay a continuing franchise fee of P6,000
annually, of which 20% must be spent on advertising by Browns.

What journal entry should Browns make on January 1, 2010 to record receipt of the initial franchise fee
and the continuing franchise fee for 2010?

a. Cash 76,000
Franchise fee revenue 70,000
Revenue from continuing franchise fee 6,000
b. Cash 76,000
Unearned franchise fee 76,000
c. Cash 76,000
Franchise fee revenue 70,000
Revenue from continuing franchise fee 4,800
Unearned franchise fee 1,200
d. Cash 76,000
Prepaid advertising 1,200
Franchise fee revenue 70,000
Revenue from continuing franchise fee 6,000
Unearned franchise fee 1,200

PROB. 15-7 (AICPA)

On December 31, 2009, Rice Inc. authorized Graf to operate as a franchisee for an initial franchise fee of
P150,000. Of this amount, P60,000 was a received upon signing of the agreement and the balance,
represented by a note, is due in three annual payments of P30,000 each beginning December 31, 2010/
the present value on December 31, 2009 of the tree annual payments appropriately discounted is
P72,000. According to the agreement, the nonrefundable 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 Rice’s December 31, 2009 balance sheet, unearned franchise fees from Graf’s franchise should be
reported as

a. 132,000
b. 100,000
c. 90,000

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 d. 72,000

PROB. 15-8 (AICPA)

On July 1, 2009 Hart Corp, signed an agreement to operate as a franchise of Ace Printers for an initial
franchise fee of P1,200,000. On the same date, Hart paid P400,000 and agreed to pay the balance in four
equal annual installment of P200,000, beginning July 1, 2010.

The doen payment 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 a 14% for 4 periods

Present value of an annuity of P1 at 4% for 4 periods
Future amount of P1 at 14% for 4 periods

At what amount should Hart record the franchise at the date of acquisition?

a. 518,000
b. 738,000
c. 982,000
d. 1,200,000

PROB. 15-9 (AICPA)

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 franchisee 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 franchisee fee that should be recognized?
a. 72,000
b. 72,315
c. 76,315
d. 90,000

PROB. 15-10 (Adapted)

On November 1, 2009, a franchise from Max Turkey foa a sales price of P5,000,000 to sell Max Turkey’s
products for a period of 20 years. Their agreement provides that P500,000,000 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 thr franchisee’s
staff and employees. The present value factors for the 9% rate follows:

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

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 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, 2009?
a. 0
b. 1,085,000
c. 4,001,000
d. 4,316,000

PROB. 15-11 (AICPA)

Each of Potter Pie Co.’s 21 new franchisee contracted to pay an initial franchise fee of P30,000. By
December 31, 2009 each franchisee has 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, 2010 and December 31, 2011

Experience indicates that one franchise will default on the additional payments. Services for the initial
franchisee fee will be performed in 2010. What amount of net unearned franchise fees would Potter
report December 31, 2009?
a. 400,000
b. 600,000
c. 610,000
d. 630,000

PROB. 15-12 (RPCPA)

Hot Pizza granted a franchise to Shake King. Shake King was to pay a franchise fee of P100,000 payable
in five equal annual installment starting with the payment upon signing of the agreement. The
franchisee was to pay monthly 1% of gross sales of the preceding month. Should the operation of the
outlet prove to be unprofitable, the franchise may be cancelled with whatever obligation owing Hot
Pizza, in connection with the P100,000 franchise fee, waived. The first year of operations generated a
gross sales of P500,000. For the first year, Hot Pizza earned franchise fee of

a. 5,000
b. 20,000
c. 25,000
d. 105,000

PROB. 15-13 (RPCPA)

Krebs Crabs, Inc. franchisor, entered into a franchise agreement with Liwayway Ligaya franchisee, on
July 1, 2009. The total franchise fees agreed upon its P1,100,000, of which P100,000 is payable upon
signing and the balance payable in four equal annual installments. It was agreed that the down payment
is not refundable, notwithstanding lack of substantial performance of services by franchisor. When
Krebs prepares its financial statements on July 31, 2009, the unearned franchise fees to be reported is:

a. 0
b. 100,000
c. 1,000,000

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 d. 1,100,000

PROB. 15-14 (Adapted)

On October 30, 2009, Dior Co. entered into franchise agreement with three franchisees. The agreements
required an initial fee payment of P700,000 plus four P300,000 payments due every 2 months, the first
payment due December 31, 2009. the initial deposit is refundable until substantial performance has
been completed. The following information describes each agreement:

Probability of Services Total Cost

Full Performed at Incurred at
Franchisee Collection__ Dec. 31, 2009 Dec. 31, 2009
Manila Corp. Likely Substantial P750,000
Makati Corp. Doubtful 25% 200,000
Ayala Co. Doubtful 30% 1,000,000

Assuming P1,000,000 was received from each franchisee during 2009, what amount of franchisee
revenue would be reported revenue would be reported in 2009?
a. 5,367,000
b. 3,467,000
c. 2,100,000
d. 1,039,000

PROB. 15-15 (RPCPA)

Andok Manok Corp. awarded its franchise to Chicken House for a total fee of P100,000. Of the said
amount, P50,000 was payable upon the signing of the agreement and the balance in two equal annual
payments. The contract provided that in the event the first year would result in an operating loss, the
franchising agreement may be cancelled without the need of returning any portion of the franchise fee
already paid nor the payment of any balance still unpaid. The entry to record the granting of franchise to
Chicken House would be:

a. No entry
b. Cash 50,000
Notes receivable 50,000
Unearned franchise fee 100,000
c. Cash 50,000
Notes receivable 50,000
Franchise for revenue 100,000
d. Cash 50,000
Notes receivable 50,000
Unearned franchise fee 50,000
Franchise fee revenue 50,000

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