MANUEL L.

QUEZON UNIVERSITY
Integrated Review 2
Advance Financial Accounting and Reporting
Rogienel L. Reyes, CPA
__________________________________________________________________________________________
Module 5: Franchise Accounting R. L. REYES

1. Franchise fees are properly recognized as revenue

A. When received in cash.
B. When a contractual agreement has been signed.
C. After the franchise business has begun operations.
D. After the franchiser has substantially performed its service.

2. Some of the initial franchise fee may be allocated to

A. Continuing franchise fees.
B. Interest revenue on the future installments.
C. Options to purchase the franchisee's business.
D. All of these may reduce the amount of the initial franchise fee that is recognized as revenue.

3. Continuing franchise fees should be recorded by the franchisor

A. As revenue when earned and receivable from the franchisee.
B. As revenue when received.
C. In accordance with the accounting procedures specified in the franchise agreement.
D. As revenue only after the balance of the initial franchise fee has been collected.

4. On January 1, 2019 Dairy Delight, Inc. entered into a franchise agreement with a company allowing the
company to do business under Dairy Delight's name. Dairy Delight had performed substantially all required
services by January 1, 2019, and the franchisee paid the initial franchise fee of P105,000 in full on that
date. The franchise agreement specifies that the franchisee must pay a continuing franchise fee of P9,000
annually, of which 20% must be spent on advertising by Dairy Delight. What entry should Dairy Delight
make on January 1, 2019 to record receipt of the initial franchise fee and the continuing franchise fee for
2019?
A. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 9,000

B. Cash 114,000
Unearned Franchise Fees 114,000

C. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 7,200
Unearned Franchise Fees 1,800

D. Prepaid Advertising 1,800

Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 9,000
Unearned Franchise Fees 1,800

5. Happy Jack's Pancake Restaurants Inc. sells franchises for an initial fee of P36,000 plus operating fees of
P500 per month. The initial fee covers site selection, training, computer and accounting software, and on-
site consulting and troubleshooting, as needed, over the first five years. On March 15, 2018, Tim Cruise
signed a franchise contract, paying the standard P6,000 down with the balance due over 5 years with
interest.

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Module 5: Franchise Accounting R. L. REYES
Assuming that the initial services to be performed by Happy Jack's subsequent to the signing are
substantial and that collection of the receivable is reasonably assured, the journal entry required at signing
would include a credit to:
A. Franchise fee revenue for P36,000.
B. Franchise fee revenue for P 6,000.
C. Unearned franchise fee revenue for P36,000.
D. Unearned franchise fee revenue for P30,000.

6. Assume that at the time of signing the contract, collection of the receivable was assured and that service
obligations were substantial. However, by October 20, 2003, substantially all continuing obligations had
been met. The journal entry required at October 20, 2003 would include a:
A. Credit to franchise fee receivable for P27,000.
B. Credit to franchise fee revenue for P9,000.
C. Debit to unearned franchise fee revenue for P36,000.
D. Debit to unearned franchise fee revenue for P27,000.

7. Assume at the time of signing the contract, collectibility of the receivable was reasonably assured and
there were no significant continuing obligations. The journal entry at signing would include a:
A. Credit to franchise fee revenue for P36,000.
B. Credit to franchise fee revenue for P9,000.
C. Credit to unearned franchise fee revenue for P36,000.
D. Credit to unearned franchise fee revenue for P27,000.

8. A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable
that the option will be exercised. When recording the initial franchise fee, the franchisor should
A. Record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment
in the purchased outlet when the option is exercised.
B. Record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid
when the option is exercised.
C. Record the portion of the initial franchise fee which is attributable to the bargain purchase option as a
reduction of the future amounts receivable from the franchisee.
D. None of these.

9. On January 2, 2018, PP Services, Inc. signed an agreement authorizing SS Company to operate as a

franchisee over a 20-year period for an initial franchise fee of P50,000 received when the agreement was
signed. SS commenced operations on July 1, 2018, at which date all of the initial services required of PP
had been performed. The agreement also provides that SS must pay annually to PP a continuing franchise
fee equal to 5% of the revenue from the franchise. SS’s franchise revenue for 2011 was P400,000. For the
year ended December 31, 2018, how much should PP record as revenue from franchise fees in respect of
SS’s franchise?
A. P70,000 C. P45,000
B. P50,000 D. P22,500

10. On September 30, 2018, Cresel, Inc. received from Genesis P550,000 representing franchise fee. Franchise
services were immediately started by Cresel and these were completed on October 31, 2018 at cost
amounting to P330,000. The gross profit to reported by Cresel in its October 31, 2018 income statement is:
A. P 0 C. P220,000
B. P137,500 D. P550,000

11. SGG Enterprises, a franchisor, charges franchisees a “franchise fee” of P500,000. Of this amount, a non-
refundable P200,000 is paid upon the signing of the contract with the balance payable in three equal
installments after each year thereafter starting 2018. SGG will assist in locating a suitable business site
conduct a market study, oversee the construction of facilities, and provide initial training for employees.

On October 1, 2017, SGG entered into a franchising agreement to cover an entirely new and untested area.
By December 31, 2017, SGG had substantially completed and rendered appropriate services at a total cost
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Module 5: Franchise Accounting R. L. REYES
of P150,000 but somehow, has raised some doubts on the collectability of the balance of the franchise fee.
In its 2017 income statement, SGG Enterprises should recognize profit of
A. P 50,000 C. P200,000
B. P140,000 D. P350,000

12. Each of Pizza Co’s 21 new franchisees contracted to pay an initial franchise fee of P30,000. By December
31, 2016, 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, 2017, and December 31, 2018. Experience
indicates that one franchise will default on the additional payments. Services for the initial fee will be
performed in 2017. What amount of net unearned franchise fees would Pizza report at December 31,
2016?
A. P400,000 C. P610,000
B. P600,000 D. P630,000

13. On September 1, 2017, Cindy Company entered into franchise agreements with two franchisees. The
agreements acquired an initial fee payment of P700,000 plus for P300,000 payments due every four (4)
months, the first payment due December 31, 2011. The market interest rate is 12%. The initial deposit is
refundable until substantial performance has been completed. The following table describes each
agreement:

Franchisee Probability of Full Services Performed by Total Costs Incurred to

Collection Franchisor December December 31, 2011
31, 2017
A Likely Substantially P700,000
B Doubtful 25% N/A

The present and future value tables at 4% for four (4) periods were as follows:

Present value of P1 0.8548

Present value of an ordinary 3.6299
annuity of P1
Future value of P1 1.1699
Future value of an ordinary of P1 4.2465

What amount of net income to be reported in 2017, assuming P1,000,000 was received from each
franchisee during the year:

Franchisee A Franchisee B
A. P1,088,970 P 0
B. P1, 788,970 0
C. P1,132,529 0
D. P1,132,529 43,559

14. Cherry, Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed
and the balance in five annual payments. The present value of the future payments, discounted at 10% is
P68,234. The franchisee has the option to purchase P15,000 of equipment for P12,000. Cherry has
substantially provided all initial services required and collectibility of the payments is reasonably assured.
The amount of revenue from franchise fees is:
A. P25,000 C. P93,234
B. P90,324 D. P115,000

“Each time you are honest and conduct yourself with honesty, a success force will drive you toward greater success.
Each time you lie, even with a little white lie, there are strong forces pushing you toward failure.”
Joseph Sugarman

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