Chapter 9

Problem I
1. Jollibee has substantially performed all material services, the refund period has expired,
and the collectibility of the note is reasonably assured. Jollibee recognizes revenue as
follows:
Cash..
Notes receivable.
Franchise revenue..

240,000
600,000
840,000

2. The refund period has expired and the collectibility of the note is reasonably
assured, but Jollibee has not substantially performed all material services. Jollibee
does not recognize revenue, but instead recognizes a liability as follows:
Cash..
Notes receivable.
Unearned franchise revenue..

240,000
600,000
840,000

Franchisor will recognize the unearned franchise fees as revenue when it has performed
all material services, the adjusting entry to record the revenue then would be:
Unearned franchise revenue...
Franchise revenue..

840,000
840,000

3. Jollibee has substantially performed all services and the collectibility of the note is
reasonably assured, but the refund period has not expired. Jollibee does not recognize
revenue, but instead recognizes a liability as follows:
Cash..
Notes receivable.
Unearned franchise revenue..

240,000
600,000
840,000

The franchisor will recognize the unearned franchise fees as revenue when the refund
period expires, the adjusting entry to record the revenue then would be:
Unearned franchise revenue...
Franchise revenue...

840,000
840,000

4. Jollibee has substantially performed all services and the refund period has expired, but the
collectibility of the note is not reasonably assured. Jollibee recognizes revenue by the
installment or cost recovery method. If we assume that Jollibee uses the installment
method, it recognizes revenue of P240,000 as follows:
Cash..
Notes receivable.
Franchise revenue..
Unearned franchise revenue

240,000
600,000
240,000
600,000

The franchisor is using the installment method, it recognizes the unearned franchise fees as
revenue in the amount of P120,000 each year as it receives cash assuming there is no cost

of franchise, the entry would be as follows:

Unearned franchise revenue
Franchise revenue..

120,000
120,000

This revenue recognition may be true only in the event there is no cost of franchise at all.
On the other hand, it may be somewhat misleading since under the installment sales
method; gross profit is earned or realized thru collections.
5. The refund period has expired, but Jollibee has not substantially performed all services
and there is no basis for estimating the collectibility of the note. Jollibee does not
recognize the note as an asset. Instead, it uses a form of the deposit method. For
example, suppose Jollibee has developed an entirely new product whose success is
uncertain and the franchisee will pay the note from the cash flows from the sale of the
product, if any. Jollibee records the initial transaction as follows:
Cash..
Unearned franchise revenue..

240,000
240,000

The franchisor may recognize the unearned franchise fees as revenue under the
accrual method in the normal manner at the completion of the services to be
performed (if collectibility is reasonably assured), the adjusting entry to record the
revenue then would be:
Unearned franchise revenue...
Franchise revenue...

240,000
240,000

Alternatively, it may recognize revenue under the installment method if it has no basis for
estimating the collectibility of the note.
6. Now assume that Jollibee has earned only P360,000 from providing initial services, with
the balance being a down payment for continuing services. If the refund period has
expired and the collectibility of the note is reasonably assured, Jollibee recognizes
revenue of P360,000 as follows:
Cash..
240,000
Notes receivable.
600,000
Franchise revenue..
360,000
Unearned franchise revenue..
480,000
The franchisor recognizes the unearned franchise revenue of P480,000 as revenue when it
performs the continuing services, the adjusting entry to record the revenue then would
be:
Unearned franchise revenue...
Franchise revenue...

480,000
480,000

In all these cases except the fifth, the franchisor accounts for the collection of interest
and principal on the note receivable in the usual manner. In the fifth situation, it does not
recognize the note and revenue until a future event occurs. In addition, the franchisor
accounts for its costs in the same way as its revenue recognition. That is, if it defers
revenue, then it defers the related cost of goods sold. Then, when it recognizes rev enue, it

matches the cost of goods sold against the revenues. The franchisee accounts for its
payments as an intangible asset.
Sometimes the franchisor collects the initial franchise fee far in advance of performing its
services. At other times collection of part of the initial franchise fee is deferred until the
franchise is operating successfully.
Problem II
1.
Cash .........................................
Unearned Franchise Fee .....................
2.
Cash .........................................
Note Receivable ..............................
Unearned I.I. or Discount on Note Receivable
Revenue from Franchise Fee .................
[P{75,000 + (P30,000 x 3.0373)] = P116,119
(Table IV n = 4, i = 12%)
3.
Cash .........................................
Note Receivable ..............................
Unearned I.I. or Discount on Note Receivable
Revenue from Franchise Fee .................
Unearned Franchise Fee .....................

75,000
75,000
75,000
120,000
28,881
166,119

75,000
120,000
28,881
75,000
91,119

Problem III
1. If there is a reasonable expectation that the down payment may be refunded and
substantial future services remain to be performed by Pizza, Inc., the entry should be:
Cash..
Notes receivable.
Unearned interest income (or Discount on notes receivable)
Unearned franchise revenue..

120,000.00
480,000.00
80,583.20
419,416,80

2. If the probability of refunding the initial franchise fee is extremely low, the amount of future
services to be provided to the franchisee is minimal, collectibility of the note is reasonably
assured, and substantial performance has occurred, the entry should be:
Cash..
Notes receivable.
Unearned interest income (or Discount on notes receivable)
Franchise revenue..

3.

120,000.00
480,000.00
96,699.84
503,300.16

If the initial down payment is not refundable, represents a fair measure of the services
already provided, with a significant amount of services still to be performed by the franchisor
in future periods, and collectibility of the note is reasonably assured, the entry should be:
Cash..
Notes receivable.
Unearned interest income (or Discount on notes receivable)
Franchise revenue..
Unearned franchise revenue

120,000.00
480,000.00
96,699.84
120,000.00
383,300.16

4. If the initial down payment is not refundable and no future services are required by the
franchisor, but collection of the note is so uncertain that recognition of the note as an asset is
unwarranted, the entry should be:

Cash..
Franchise revenue..

120,000.00
120,000.00

Where the collection of the note is extremely uncertain, revenue thru gross profit is
recognized by means of cash collection using the cost recovery method.
5.

If the initial down payment is refundable or substantial services are yet to be performed, but
collection of the note is so uncertain that recognition of the note as an asset is unwarranted,
the entry should be:
Cash..
Unearned franchise revenue..

120,000
120,000

Where the collection of the note is extremely uncertain, revenue thru gross profit is
recognized by means of cash collection using the cost recovery method.
Problem IV
1. If the down payment is refundable, and no services have been rendered at the time the
arrangement is made, and collection on the note is reasonably certain, the entry should be:
Cash..
Notes receivable.
Unearned interest income (or Discount on notes receivable)
Unearned franchise revenue..

120,000.00
180,000.00
37,354.50
262,645.50

2. Initial services are determined to be substantially performed, the refund period has expired
and the collection of the note is reasonably assured, the full accrual method would be used.
Assume that substantial performance of the initial services costs P52,529.1 the entry should be:
Cash..
Notes receivable.
Unearned interest income (or Discount on notes receivable)
Franchise revenue..

120,000.00
180,000.00

Cost of franchise revenue

Cash, etc

52,529.10

37,354.50
262,645.50

52,529.10

Few months after, the collectibility of the note becomes doubtful or no reasonable assurance,
the installment sales method could be used as a general rule. In addition to the entries
above, following entries would be required:
a. To set-up cost of franchise:
No entry required, already set-up previously.
b. To defer gross profit on franchise:
Franchise revenue
Cost of franchise revenue
Deferred gross profit on franchise

262,645.50
52,529.10
210,116.40

c. Adjustments to recognize gross profit on franchise:

Deferred gross profit on franchise
Realized gross profit on franchise
Franchise revenue..

96,000.00
96,000.00
262,645.5

Less: Cost of franchise revenue

Gross profit..
Gross profit rate (210,116.4/262,645.5)
Collections as to principal.
Multiplied by: Gross profit rate.
Realized gross profit on franchise..

52,529.1
210,116.4
80%
P120,000.00
80%
P 96,000.00

Problem V
If we assume that ECHI, whose fiscal year ends on December 31, secures the lease and the
permits on February 1, 20x5, and operations commence at that time, the following journal
entries would be appropriate:
July 1, 20x3:
Cash..
Notes receivable.
Unearned franchise revenue..

120,000
480,000
600,000

Deferral of revenue recognition is required when substantial performance" of franchisor

services has not been completed. It would call for deferral of revenue recognition until
evidence of service performance was available. The best evidence, of course, would be the
commencement of operations of the franchise outlet and at this point in time, revenue is
recognized.
During 20x3:
Deferred cost of franchise revenue.
Cash....

360,000
360,000

December 31, 20x3:

Interest receivable (P480,000 x 14% x 6/12)..
Cash....

33,600
33,600

February 1, 20x4:
Unearned franchise revenue..
Franchise revenue..

600,000
600,000

Cost of franchise revenue..

Deferred cost of franchise revenue..

360,000
360,000

Problem VI
Reasonably Assured
January 1, 20x4
Cash..
Notes receivable.
Unearned franchise revenue.

1,500,000
4,500,000

No reasonable
assurance
1,500,000
4,500,000

6,000,000

6,000,000

Receipt of initial franchise fee.

Conditions to be met:
Services
Period of refund
Collectibility

Cash
No
Yes

Notes
No
Yes
Reasonably
assured

Cash
No
Yes

Notes
No
Yes
No
reasonable
assurance

1/1/20x4 Balance
Status
December 31, 20x4
Cash..
Notes receivable.
Interest income (P3,750,000 x 10%)

1,500,000
Liability

4,500,000
Liability

1,575,000

1,500,000
Liability

4,500,000
Liability

1,575,000
1,125,000
450,000

1,125,500
450,000

Annual collection.

Deferred cost of franchise

Cash

1,800,000

1,800,000
1,800,000

1,800,000

To defer cost of franchise since substantial

services had not been performed.

Operating expenses
Cash

120,000

120,000
120,000

120,000

To record expenses.

Adjustments:
Cost of franchise
Deferred cost of franchise

1,800,000
1,800,000

To recognize cost of franchise.

Unearned franchise revenue.

Franchise revenue

6,000,000
6,000,000

To recognize franchise revenue based on the

following analysis:

Conditions to be met:
Services
Period of refund
Collectibility
1/1/20x4 Balance..
12/31/20x4: Collection as to principal
12/31/20x4 Balance
Status

Cash
Yes
Yes

1,500,000
1,125,000
2,625,000
Revenue

Notes
Yes
Yes
Reasonably
assured
4,500,000
(1,125,000)
2,625,000
Revenue

Adjustments (Installment sales method)

a. To set-up cost of franchise:
No entry*
b. To set-up deferred gross profit
Unearned franchise revenue
Deferred cost of franchise revenue
Deferred gross profit

6,000,000
1,800,000
4,200,000

*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be
closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to
Illustration 9-6 for alternative treatment to set-up cost of franchise.

Conditions to be met:
Services
Period of refund
Collectibility
1/1/20x4 Balance..
12/31/20x4: Collection as to principal
12/31/20x4 Balance

Cash
Yes
Yes

1,500,000
1,125,000
2,625,000

Notes
Yes
Yes
No
reasonabe
assurance
4,500,000
(1,125,000)
2,625,000

Status

Revenue
I/S Method

c. To recognize realized gross profit on

franchise:
Deferred gross profit
Realized gross profit on franchise

Liability

1,837,500
1,837,500

Collections principal x gross profit rate

P2,625,000 x (6,000 1,800)/6,000 = P1,837,500

2.
Reasonably Assured
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)*
Less: Cost of franchise (accrual method)*
Gross profit on regular franchise
(accrual)*
Add: Gross profit on franchise (installment
sales method)
Gross profit on franchise
Less: Operating expenses
Add: Interest income..
Net income.

No reasonable
assurance

P6,000,000
1,800,000

0
0

P4,200,000

-0P4,200,000
120,000
P4,080,000
450,000
P4,530,000

*1,837,500
P1,837,500
120,000
P1,717,500
450,000
P2,167,500

Problem VII

1.

Reasonably Assured
January 1, 20x4
Cash..
Notes receivable.
Unearned interest income*
Unearned franchise revenue.

1,440,000
3,840,000

No reasonable
assurance
1,440,000
3,840,000

796,896
4,483,104

796,896
4,483,104

Receipt of initial franchise fee.

Conditions to be met:
Services**
Period of refund until date of
Opening
Collectibility
1/1/20x4 Balance
Status

Cash
No

Notes (PV)
No

Cash
No

Notes (PV)
No

No

No
Reasonably
assured

No

1,440,000
Liability

3,043,104***
Liability

1,440,000
Liability

No
No
reasonable
assurance
3,043,104***
Liability

*Unearned interest income or discount on notes receivable: P3,840,000 P3,043,104 = P796,896.

* *Services had been substantially performed only on the date of opening which is December 8. Revenue is deferred and
subsequent direct cost of franchise should also be deferred.
***P960,000 x 3.1699 = P2,535,920

February 2, 20x4:
Deferred cost of franchise
Cash
To defer cost of franchise since substantial
services had not been performed.

144,931.20

144,931.20
144,931.20

144,931.20

June 13, 20x4:

General expenses
Cash

60,000

60,000
60,000

60,000

To record expenses.

August 8, 20x4:
Deferred cost of franchise
Cash

360,000

360,000
360,000

360,000

To defer cost of franchise since substantial

services had not been performed.

November 2, 20x4:
Deferred cost of franchise
Cash

840,000

840,000
840,000

840,000

To defer cost of franchise since substantial

services had not been performed.

November 2, 20x4:
Substantial completion of services.
December 31, 20x4:
Cash..
Notes receivable

960,000

960,000
960,000

960,000

Annual collections.

Adjustments:
Unearned interest income
Interest income
To recognize interest income thru
amortization as follows:
10% x P3,043,104 = P304,310.4.
Cost of franchise
Deferred cost of franchise

304,310.40

304,310.40
304,310.40

1,344,931.20
1,344,931.20

To recognize cost of franchise.

Unearned franchise revenue.

Franchise revenue

4,438,1040
4,438,1040

To recognize franchise revenue based on the

following analysis:

Conditions to be met:
Services**
Period of refund outlet already
opened.
Collectibility
1/1/20x4 Balance
12/31/20x4:
Collection..... . P960,000
Less: Interest collection
304,310.40
Collection Principal.P655,689.60

Status
Adjustments (Installment sales method)
a. To set-up cost of franchise:
Cost of franchise revenue..

Cash
Yes

Notes (PV)
Yes

Yes

Yes
Reasonably
assured
4,438,104

1,440,000

655,689.60

2,095,689.60
Revenue

( 655,689.60)
2,387,414.40
Revenue

1,344,931.20

304,310.40

Deferred cost of franchise revenue

1,344,931.20

b. To set-up deferred gross profit:

Unearned franchise revenue
Cost of franchise revenue
Deferred gross profit

3,483,104
1,344,931.20
2,138,172.80

*There are different options on this matter, an entry may be made to set-up cost of franchise and eventually it will be
closed to set-up deferred gross profit. Regardless of the option, the objective is to set-up deferred gross profit. Refer to
Illustration 9-5 for alternative treatment to set-up cost of franchise.

Conditions to be met:
Services**
Period of refund outlet already
opened.
Collectibility
1/1/20x4 Balance
12/31/20x4:
Collection..... . P960,000
Less: Interest collection 304,310.40
Collection Principal.P655,689.60

Cash
Yes

Notes (PV)
Yes

Yes

Yes
No
reasonable
assurance
304,104

1,440,000

655,689.60
2,095,689.60
Revenue
I/S Method

Status

c. To recognize realized gross profit on

franchise:
Deferred gross profit
Realized gross profit on franchise

( 655,689.60)
2,387,414.4
Liability

1,466,983.20
1,466,983.20

Collections principal x gross profit rate

P2,095,689.60 x (4,483,104 1,344,931.20)/4,483,104 = P1,466,983.20

2.
Reasonably Assured
Income Statement, 12/31/20x4:
Franchise revenue (accrual method)*
Less: Cost of franchise (accrual method)*
Gross profit on regular franchise
(accrual)*
Add: Gross profit on franchise (installment
sales method)
Gross profit on franchise
Less: Operating expenses
Add: Interest income..
Net income.

No reasonable
assurance

P 4,471,1040

0
0

1,344,931.20

P3,138,172.8
-0P3,138,172.8
60,000
P3,078,172.8

*1,466,983.20
P1,466,983.20
60,000
P1,406,983.20

304,310.40
P3,382,483.20

304,310.40
P1,771,293.60

*Note: This item represents regular franchise sales-type transaction. If the collectibility of the fee
(note receivable) is reasonably assured, the permissible method to be applied should be the
accrual method. It should be observed that in the event, there is cost of franchise and the
installment sales method is used, the concept of revenue recognition does literally apply to
franchise revenue but to the recognition of realized gross profit on franchise thru collections as to
principal multiplied by gross profit rate.
Alternatively, computation of interest and principal collections are as follows:

Date
1/03/20x4
1/03/20x4
12/31/20x4
Total

Collection

Interest (10% of
Unpaid Balance)

Principal

1,440,000
960,000
2,400,000

-0304,310.40
304,310.40

1,440,000
655,689.60
2,095,689.60

Unpaid Balance
4,483,104
3,043,104
2,387,414.40

Problem VIII
1. The fee is earned for providing continuing services:
Cash or Accounts receivable
Franchise revenue continuing franchise fee

108,000
108,000

2. If P10,000 of the fee is for national advertising:

Cash or Accounts receivable
Franchise revenue continuing franchise fee
Unearned franchise revenue continuing franchise fee

108,000
96,000
12,000

The franchisor recognizes the unearned franchise fees as revenue when it performs the
advertising services and also records the costs as expenses, the entries should be:
Advertising expenses
Cash, etc..
Unearned franchise revenue continuing franchise fee
Franchise revenue continuing franchise fee

xxx
xxx
12,000
12,000

Problem IX
March 20:
Cash
Notes receivable
Unearned franchise fee

5,000
20,000
25,000

June 15:
Unearned franchise revenue
Franchise revenue

25,000
25,000

July 15:
Cash
Service revenue

500
500

Problem X
Cash or Accounts receivable
Franchise revenue supplies sales..
Cost of franchise supplies sales
Supplies inventory.

117,600
117,600
90,000
90,000

Problem XI
Cash.
Notes receivable (P108,000 P21,600)
Unearned interest income (P86,400 P69,978)
Franchise revenue (P21,600 + 69,978 P4,800*)
Unearned franchise revenue equipment sale*

21,600
86,400
16,422
86,778
4,800

All the criteria to recognize initial franchise fee as revenue was met, except that an amount of
P4,800 equivalent to indicated profit (P24,000, selling price less P19,200 option price) will be
deferred.
When the franchisee subsequently purchases the equipment, the entries are as follows:
Cash or Accounts receivable
Unearned franchise revenue equipment sale
Franchise revenue equipment sale..

19,200
4,800

Cost of franchise - equipment sale.

Equipment inventory.

19,200

24,000

19,200

Problem XII
April 1, 20x4:
Cash.
Notes receivable
Franchise revenue (P21,600 + P86,400 P4,800*)
December 31, 20x4:
Franchise revenue initial franchise fee
Interest income (P192,000 x 8% x 9/12)
Cash (P153,600 P11,520).
Notes receivable
Gain or revenue from repossessed franchise

288,000
192,000
480,000

480,000
11,520
142,080
192,000
134,400

Problem XIII
Cash
Notes receivable
Deferred franchise purchase option liability.

72,000
360,000

Deferred cost of franchise revenue

Cash, etc

288,000

Investment..
Deferred franchise purchase option liability.
Deferred cost of franchise revenue
Cash, etc

120,000
432,000

432,000

288,000

Multiple Choice Problems

1. a following conditions should be observed to recognize revenue:
Services none
Period of Refund expired
Collectibility of the note reasonably assured
There was failure on one condition; therefore, no revenue should be recognized.
2. d following conditions should be observed to recognize revenue:
Services Performed yes
Period of Refund not expired / still refundable
Collectibility of the note reasonably assured
There was failure on one condition; therefore, no revenue should be recognized.

288,000
264,000

3. a - following conditions should be observed to recognize revenue:

Services Performed none
Period of Refund expired
Collectibility of the note very uncertain or extremely uncertain.
There was failure on one condition; therefore, no revenue should be recognized. Since, the
collectibility of the note is extremely uncertain recognition of the note as an asset in
unwarranted (or should not be recorded).
4. d the problem already indicated that P300,000 is earned, therefore the remaining balance
of P400,000 (P700,000 P300,000 is considered as unearned revenue.
5. a
Cash
Notes receivable
Unearned franchise fee

6,000
30,000

Unearned franchise fee

Franchise fee revenue

36,000

Cash
Notes receivable
Franchise fee revenue

6,000
30,000

36,000

6. b
36,000

7. a
36,000

8. b
9. b
10. d
11. d the franchise fee revenue should be zero, since no substantial performance of services
had been performed (and the down payment is still refundable).
12. b
In this problem, since there is doubtful of collection, it is safely assumed to used installment
method. Therefore, the realized gross profit would be:
Collections in 20x4..P 200,000
x: Gross profit rate [100% - (P150,000/P500,000)].
70%
Realized gross profit in 20x4. P 140,000
Revenue Analysis:
Cash
N/R
Services
Yes
Yes
Period of Refund
Yes
Yes
Collectibility
No Reas.
Assured
200,000
300,000
Status
Rev I/S Method
Liability
13. d
In this problem, full accrual method is used to recognized the initial franchise fee of
Initial Franchise Fee:
Services

Cash
Yes

Notes Receivable
Yes

Period of Refund
Collectibility
Status

Yes
P20,000
Revenue

Yes
Reasonably Assured
P80,000
Revenue

Substantial performance of services has been rendered because commencement of

operations by the franchisee shall be presumed to be the earliest point of which substantial
performance has occurred, unless it can be demonstrated that substantial performance of
all obligations, including services rendered voluntarily, has occurred before that time.
Period of refunding the initial franchise fee and collectibility of the notes is not anymore a
problem (they depend on the profitability of its first year of operations) because the result
of operations in the first year is profitable. Therefore, the initial franchise fee of P100,000
(P20,000 + P P80,000) is considered as revenue, and a continuing franchise fee of P5,000
(1% x P500,000) should be also be recognized as revenue continuing fanchise.
Therefore, the earned franchise fee amounted to P105,000 (P100,000 initial plus P5,000
continuing).
14. a
Initial franchisee revenue (since all services had been performed
and assumed that period of refunding already expired).. P100,000
Add: Continuing franchise revenue (5% x P800,000) 40,000
Total Revenue from franchise. P140,000
15. d
There is already substantial performance of services rendered since, the franchise outlet
started operations and it is assumed that period of refund has expired.
The continuing franchise fee is recognized also as revenue since it is earned at the time it
was received.
The net income would be:
Franchise Revenue:
Initial Franchise Fee:
Down payment P 30,000
PV of installment (P10,000 x 1.7355).
17,355 P47,355
Continuing Franchise Fee (5% x P500,000)
25,000
Total Franchise Revenue
P72,355
Add: Interest Income (10% x P17,355)
1,735
Total Revenue/Net Income
P74,090
16. a
All conditions that initial franchise fee be recognized as revenue had been met as follows:
Revenue Analysis for IFF
Cash
N/R
Services
Yes
Yes
Period of Refund
Yes
Yes
(note)
Collectibility
Reas. Assured
200,000
300,000
Status
Revenue
Revenue

The Net Income then would be as follows:

Franchise Revenue..P 500,000
Less: Cost of Franchise 150,000
Net IncomeP 350,000
17. d
In this problem, full accrual method is used to recognized the initial franchise fee of
P100,000 analyze as follows:
Revenue Analysis for IFF
Cash
N/R
Services
Yes
Yes
Period of Refund
Yes
Yes
(note)
Collectibility
Reas. Assured
20,000
80,000
Status
Revenue
Revenue
Note: Period of refunding the initial franchise fee was presumed to have been expired
since the business operates profitably in its first year of operation.
Continuing Franchise Fee: Considered revenue the moment continuing services had been
rendered amounted to P5,000 (1% x P500,000).
Initial Franchise FeeP 100,000
Continuing franchise fee.
5,000
Total P 105,000
Less: Indirect cost of franchise
15,000
Net incomeP 90,000
18. d
Revenue = P400,000
Interest income = P
P9,600
Cash = P128,000 P9,600 = P118,400
Repossession revenue: P240,000 P128,000 = P112,000.
19. c
Cash = P560,000 + P48,000 = P608,000
Franchise Fee Revenue = P560,000
Unearned Franchise Fees = P
P9,600
Revenue from Continuing Franchise Fees = P48,000 P9,600 = P38,400.
20. b - P200,000 + P545,872 P24,000 = P721,872.
21. b

Franchisee frequently purchases all of the equipment, products, and supplies from the franchisor.
The franchisor would account for these sales as if, it would be a product sales. Sometimes,
however, the franchise agreement grants the franchisee the right to make bargain purchases of
equipment or supplies after the initial franchise fee is paid. If the bargain price is lower that the
normal selling price of the same product or it does not provide the franchisor the reasonable profit,
then, a portion of the initial franchise fee should be deferred. The deferred portion would be
accounted for as adjustment of the selling price when the franchisee subsequently purchases the
equipment or supplies. Therefore, the amount of revenue would be P90,234 computed as follows:
Cash

Notes Receivable

Services
Period of Refund
Collectibility

Yes
Yes
P25,000
Revenue

Status

Yes
Yes
Reasonably Assured
P68,234
Revenue except
P3,000 reasonable
profit on sale of
equipment

The revenue from franchise would be:

Cash P 25,000
PV of Note..P68,234
Less: Reasonable profit on sale of
Equipment P15,000 P12,000). 3,000
65,234
P 90,234
Incidentally, the entries would be:
Upon receipt of IFF:
Cash 25,000
Notes Receivable 90,000
Unearned Interest Income (P90,000 P68,234).
21,766
Franchise Revenue.
90,234
Unearned Franchise Revenue.
3,000
If equipment was sold:
Cash or Accounts Receivable 12,000
Unearned Franchise Revenue 3,000
Franchise Revenue Equipment
15,000
Cost of Sales equipment 12,000
Equipment Inventory..
12,000

22. b
Cash
No
No

Services
Period of Refund
Collectibility

P25,000
Liability

Status
Theories
1. True
2. False
3. False
4. False
5. True

6.
7.
8.
9.
10,

True
True
True
b
d

11.
12.
13.
14.
15,

a
b
a
d

Notes Receivable
No
No
Reasonably Assured
PV - P39,623
FV P50,000
UII/Disct. P10,377
Liability