ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

FRANCHISE ACCOUNTING:

PROBLEM A: Jalibi Food Corporation enters into franchise agreement on June 1, 2019 with Mr. Tony Tan
Kak Chong for a package with total fee of P 500,000. The right granted is to operate the business for 4 years.
The terms of payment provide that a down payment of P 180,000 shall be paid and balance is payable in 4
years. Mr. Chonga issued an 8% non-interest bearing note for the balance. (PV of ordinary annuity 3.31212).
The agreement provides for a royalty payment of 2% of the monthly gross sales.
The total fee of P500,000 includes the following with their stand-alone prices:

• Rights to trade name and market area ……………………….................. 250,000

• Machinery and Equipment (Food Stall) (cost 80,000) ................. 100,000
• Site location; feasibility studies; Training and other services..............50,000

All the services inclusive in the package were performed as of October 30, 2019 while the equipment was
installed only on January 1, 2020. The franchise commenced operations on January 15, 2020. The total gross
sales in 2020 amounted to P 1,500,000.

1. Using old franchise accounting (not applying PFRS 15), how much revenue from initial franchise
fee shall be recognized on December 31, 2019?
A. 0
B. 12,365.25
C. 264,969.60
D. 444,969.60

2. Using old franchise accounting (not applying PFRS 15), how much revenue shall be recognized on
December 31, 2019?
A. 0
B. 12,365.25
C. 264,969.60
D. 444,969.60

3. If Jalibi Food Corporation satisfied the obligation at point in time as when Mr. Chong has obtained
control of the rights, how much of the total contract price is allocated to the transfer of rights, sale of
equipment and services? (applying PFRS 15)
A. 250,000; 100,000 and 50,000
B. 312,500; 125,000 and 62,500
C. 278,106; 111,242.40 and 55,621.20
D. 444,969.40; 0 and 0

4. If Jalibi Food Corporation satisfied the obligation at point in time as when Mr. Chong has obtained
control of the rights, how much revenue shall be recognized in December 31, 2019? (applying PFRS
15)
A. 12,365.25
B. 45,621.20
C. 67,986.45
D. 377,334.65

AFAR QUICKNOTES
BY: ATTY. IVAN YANNICK S. BAGAYAO CPA, MBA 1
 ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

5. If Jalibi Food Corporation satisfied the obligation at point in time as when Mr. Chong has obtained
control of the rights, how much revenue shall be recognized in December 31, 2020? (applying PFRS
15)
A. 228,105.87
B. 319,348.22
C. 337,801.67
D. 437,801.85

6. If Jalibi Food Corporation satisfied the obligation and provides access to the rights and must
continue (recognized over time) to perform updates and services, how much revenue shall be
recognized in December 31, 2019? (applying PFRS 15)
A. 12,365.25
B. 45,621.20
C. 67,986.45
D. 377,334.65

7. If Jalibi Food Corpration satisfied the obligation and provides access to the rights and must
continue (recognized over time) to perform updates and services, how much revenue shall be
recognized in December 31, 2020? (applying PFRS 15)
A. 45,621.12
B. 155,316.97
C. 166,863.52
D. 229,222.35

(REPOSSESSION or CANCELLATION OF FRANCHISE)

PROBLEM B: On March 1, 2019,VOLFANGO, Inc., entered into a franchise agreement with Mr. Dalimot a well-
known businessman. The franchisee paid P300,000 and gave 200,000, 12%, 5 year note payable with interest due on
March 1. On December 31, 2019, the franchisee decided not to open the outlet despite the substantial performance
made as of June 30, 2019.On December 31, 2019, VOLFANGO cancelled the franchisee’s note and refunded P
180,000, that includes interest earned on the note.

1. On December 31, 2019, how much will VOLFANGO recognize as the gain or (loss) from repossessed
franchise?
a. 120,000
b. 160,000
c. 200,500
d. 500,000

(OPTION TO REPURCHASE THE FRANCHISE)

PROBLEM C: On March 3, 2019, BAMBY, Inc. has signed an agreement allowing GOERGY to sell the former’s
products under its trade name. The contract called for P500,000 down and a 10% note for P1,500,000 balance, payable
in five annual payments. The franchisor has completed all the initial services required and the outlet has started

AFAR QUICKNOTES
BY: ATTY. IVAN YANNICK S. BAGAYAO CPA, MBA 2
 ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

operations early in December. However, it was noted that the franchisor had the right to redeem the franchise and it
was reasonably certain to happen.

1. How much unearned franchise fees will be reported by the franchisor in 2018 balance sheet?
a. 0
b. 500,000
c. 1,500,500
d. 2,000,000

PROBLEM D: Jollijeep sells franchise for initial fee of P 500,000. This covers site selection, training, computer and
accounting software over the first 4 years. On April 30, 2019, Mcdow signed a franchise agreement, paying 10% down
payment with balance due over 5 years evidenced by 10% interest bearing note. The agreement provides that Jollijeep
has the option to purchase within 4 years to acquire McDow’s business. The collectability of the note is certain, refund
period has expired and all the obligations were performed by Jollijeep. In fact, Jollijeep rendered service to the
franchisee amounting to P 200,000.

1. If Jollijeep exercised the option and acquired the franchise by paying P 120,000 on the 4th year, how much
is the gain or (loss) on option to purchase the outlet?

a. 120,000
b. 162,500
c. 180,000
d. 350,000

AFAR QUICKNOTES
BY: ATTY. IVAN YANNICK S. BAGAYAO CPA, MBA 3