CHAPTER 11 - Franchise Accounting (Advanced Accounting - Guerrero)

Franchise Franchi se Accounting Accoun ting

177

CHAPTER 11 MULTIPLE CHOICE ANSWERS AND SOLUTIONS 11-1: b No revenue is to be reported. reported. Because the franchisor fails to render substantial substantial services to the franchisee as of December 31, 2008. 11-2: c

Initial franchise fee Less: Cost of franchise

P5,000,000 ____50,000

Net income

P4,!0,000

11-3: a

The total initial franchise fee of P!00,000 is to be recognized as earned because the collectibility of the note for the balance is reasonably assured. 11-4: b

Cash downay!ent Collection of note alying to rincial

P "00,000 __#00,000

"evenue from initial franchise fee

P 300,000

Cash downay!ent, $anuary #, #00% Collection alying to rincial, &ece!ber '", #00%

P#,000,000 _",000,000

Total Collection (ross rofit rate )*5,000,000+500,000 )*5,000,000+500,000

',000,000 _____0/

11-5: a



5,000,000-

"eali#ed $ross profit, profit, December 31, 2008

P2,%00,000

11-6: b

ace 1alue of the note *P",#00,000 + P200,000 Present 1alue of the note *P#00,000 3 #."

P %0 %00,000 __5%#,000

&nearned interest income, 'ul( 1, 2008

P 218,000

Initial franchise fee Less: unearned interest inco!e

P",#00,000 __#"%,000

Deferred revenue from franchise fee fee

P 82,000

11-7: d

11-8: d

Initial franchise fee Continuing franchise fee *P200,000 3 .05

P 500,000 ___#0,000

Total re1enue Cost

5#0,000 ___"0,000

Net income

P !10,000

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178 Chapter 11

11-: b

&eferred 4e1enue fro! franchise fee: &ownay!ent Present 1alue of the note *P",000,000 3 #." P%,"0,000 Less: Cost of franchise fee _#,000,000

P,000,000 #,"0,000

&eferred gross rofit P,"0,000 (ross rofit rate *,"0,000



%,"0,000

66.55/

&ownay!ent *collection during #00% P,000,000 (ross rofit rate ___66.55/ 4ealized gross rofit fro! initial franchise fee P2,5',000 7dd: Continuing franchise fee *5,000,000 3 .05 __#50,000 Total P2,0',000 Less: ranchise e8ense ___50,000 9erating inco!e P2,%5',000 Interest inco!e, "#'"05 *P#,"0,000 3 "2/ 3 "# __#0',600 Net income P!,0!),%00 11-1!: b

ace 1alue of the note recei1able P",%00,000 Present 1alue of the note recei1able ",#',00 ;nearned interest inco!e 5',"00 Initial franchise fee

P







11-11: a

4e1enues fro!: Initial franchise fee P",000,000 Continuing franchise fee *P#,000,000 3 .05 "00,000 *otal revenue from franchise fee s P1,100,000 11-12: d

4ealized gross rofit fro! initial franchise fee )*'50,000 < 0,000 8 '6/P "#,%00 Continuing franchise fee *P"#",000 < P"26,500 8 5/ ___"',2#5 Total re1enue =8enses ___2#,00

"6,##5

>et oerating rofit rofit Interest inco!e *P00,000 8 "5/ 8 "# ___6,500

"'','#5

Net income P 200,82!


179

11-13: c

Cash down+ay!ent

P

5,000 Present of the note *P20,000 8 '.0'62 __"#",2 *otal 4) 11-14: a

Initial franchise fee P 50,000 Continuing franchise fee *P200,000 8 5/ __#0,000 *otal revenue

P 21),







P #0,000 Continuing franchise fee *P500,000 8 "#/ __0,000 *otal earned franchise fee P 80,000 11-16: a

The unearned interest credited is the difference between the face 1alue and the resent 1alue of the notes notes recei1able *00,000 @ 6#0000. 6#0000. The down ay!ent of P00,000 is recognized as re1enue since it is a fair !easure of the ser1ices already erfor!ed by the franchisor. franchisor. 11-17: b

Cora *P"00,000 < P500,000 &ora *P"00,000 < P500,000 *otal

P 00,000 00,000 P1,200,000

&own ay!ent *',"#5,000 8 20/ Present 1alue of notes recei1able * ",%65,0002 2%,650 8 '.02 7dAusted sales 1alue of initial franchise fee &irect cost of ser1ice s (ross rofit

P",#50,000 ",2#5,000 #,65,000 %0#,500 ",%6#,500

11-18:

(ross rofit rate *",%6#,500 B #,65,000

60/

180 Chapter 11

Date Collection Interest Principal "" '0 2%,650 "6",000 #6,650 "#'0 2%,650 "'5,#60 ''',2%0 Total collection alying to rincial '",#'0 &own ay!ent ",#50,000

Balance of PV of NR P",2#5,000 ","#6,#50 6',660







11-1: c


181

SOLUTIONS TO PRO"LEMS P#$b%&' 11 ( 1 a)

The collectibility of the note is reasonably assured.







Cash... ............................................................................. .... >o1. >o1. '0:

&ec. &ec. '": '":

#,000,000

Cash74............. .................... .......... ..................... ..................... ................ ........... .......... .......... ..... 4e1e 4e1enu nuee fro! fro! cont contin inui uing ng fran franch chis isee fee fee *C *C. ... .... .... .... .... ..... ...

#,000

Cash Cash  74... 74...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ........ ........ ...... 4e1enue fro! C.......................................................

',0 ',000 00

#,0 #,000 00

',000

Cash.... Cash.... ............................. ........................................... ............................. ............................. .................... ...... #,%00,000 #,%00,000 >otes recei1able........................................ ...... ...... ...... ....... ...... ...... ... Interest inco!e *P%,000,000 8 "0/.............................

#,000,000 %00,000

+dustin$ -ntries *" Cost Cost of franch franchise ise re1enu re1enue... e....... ......... .......... .......... .......... .......... ............. ........... ... #,000, #,000,000 000 &eferred cost of franchises..................................

#,000,000

*#

&eferr &eferred ed re1enu re1enuee fro! fro! I...... I.......... .......... ............... .................. ...............#0 ......#0,00 ,000,0 0,000 00 4e1enue fro! I.................................................. To recognize re1enue fro! the initial franchise fee.

b)

#0,000,000

The collectibility of the note is not reasonably assured. $an. # to &ec. '"  4efer to assu!tion a. 7dAusting entry: to recognized re1enue fro! the initial franchise fee *install!ent !ethod *"

/2 /2

*o defer $ross profit &eferred 4e1enue fro! I.......................................#0,000,000 Cost of ranchise 4e1enue.................................. &eferred gr gross r rofit @ ranchises....................... (P4  P"%,000  P#0,000,000  0/ *o reco reco$n $ni# i#ee $ros $rosss prof profit it &eferred gross rofit @ ranchises............................."#,00,000 4ealized gross rofit............................................ *P"2,000,000 3 0/

#,000,000 "%,000,000

"#,00,000

182 Chapter 11

a)

P#$b%&' 11 ( 2 C$%% C$%%&c &c*+ *+$, $, $ $ *.& *.& ,$*& ,$*& +/ +/ #&a/ #&a/$, $,ab ab%0 %0 a// a//# #&d &d)) $an. $an. 5: Cash. Cash. ............... .................... .......... .......... .......... ......... ......... .......... .......... .......... .......... .......... .......... ......... .......... ...... 00,00 00,000 0 >otes 4ecei1able................. ..................... ........... ................... .............. .......... .......... ......... .... ",000,000 ;nearned interest inco!e

20" %%0









>o1. >o1. #5:

&ec. &ec. '": '":

&eferred cost of ranchise................. ..................... ........... ................ .......... .... Cash..............................................................................

"6,6"%

Cash Cash  74... 74...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ........ ........ ...... 4e1enue fro! C....................................................... *P%0,000 3 5/

2,00 2,000 0

Cash........ Cash............. .......... .......... .......... .......... ......... ......... .......... .......... .......... .......... .......... .......... ......... .......... ...... >otes 4ecei1able..........................................................

#00,00 #00,000 0

+dustin$ -ntries " ;nearned interest inco!e........... .................... ........... ......... ......... ..... ......... ......... .... Interest inco!e............ ..................... .......... ..................... ................... .............. ....... .. P!8,120  20

# Cost Cost of ranch ranchise ise..... ......... ......... .......... .......... .......... .......... .......... .......... ......... ......... .............. ......... &eferred cost of ranchise.........................................

b)

"6,6"%

2,000

#00,000

"",#2 "",#2 "",#2

"6,6" "6,6"% % "6,6"%

' &eferred &eferred re1enue re1enue fro! ......................... ................................................ ....................... ","%,"#0 ","%,"#0 4e1enue fro! ....................................................... C$%%&c C$%%&c*+$ *+$, , $ $ *.& *.& ,$*& ,$*& +/ ,$* #&a/$, #&a/$,ab% ab%0 0 a// a//#& #&d) d) $an. 5 to &ec. '" before adAusting entries @ 4efer to 7ssu!tion a. &ec. '": +dustin$ -ntries " ;nearned ;nearned interest inco!e............ .................... .......... .................... ............... ....... .. Interest Interest inco!e............. inco!e............................ ..................................... ...................... ........ # Cost Cost of franch franchise ise..... .......... .......... .......... .......... .......... .......... ......... ......... .......... .......... ........... ......... ... &eferred cost of franchise..........................................

","%,"#0

"",#2 "",#2 "",#2 "6,6" "6,6"% %

' &eferred &eferred re1enue re1enue fro! ......................... ................................................ ....................... ","%,"#0 ","%,"#0 Cost of of r ranchise....................................................... &eferred gr gross r rofit @ r ranchise............................... (P4  ",0"%,20#  ","%,"#0  %5/

"6,6"%

"6,6"% ",0"%,20#







;nearned ;nearned interest interest inco!e........... inco!e......................... ............................. ................................... .................... P ,20% ,20% ?et. " to >o1. >o1. "5: &eferred cost of franchise................. ................... .......... .............. ......... ......... .......... ......... .... Cash. ..... .. ............................................................................... *P50,000 < P'0,000 &ec. '": 7dAustin 7dAusting g =ntry: =ntry: ;nearn ;nearned ed inter interest est inco inco!e.. !e...... ......... .......... .......... ......... ......... .......... .......... .......... .......... ............. .......... .. Interest inco!e..................................................................... *P#5',5# 8 "0/ 8 "#

%0,000 %0,000

"#,%0 "#,%0 "#,%0

2008 $an. $an. "0: &eferr &eferred ed cost cost of franch franchise. ise...... .......... .......... .......... .......... ......... ......... .............. .................. ............... ...... Cash. ..... .. ...............................................................................

50,000 50,000

$uly $uly ": ":

%0,0 %0,000 00

Cash Cash.. ............. ................ ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... >ote recei1able................ .................... .......... ..................... ................... ............. .......... ......... ....

&ec. '": +dustin$ -ntries: *" Cost Cost of franch franchise ise.... ......... .......... .......... .......... .......... .......... ......... ......... .......... .......... .............. .............. ..... &eferred cost of franchise.................................................

50,000

%0,000

"'0,00 "'0,000 0 "'0,000

*# &eferr &eferred ed re1enu re1enuee fro! fro! ... ....... ......... .......... .......... ........... ............... ................. ............... ....... 4e1enue fro! ..............................................................

'6',5 '6',5# #

*' *' ;nea ;nearn rned ed inte intere rest st inco inco!e !e... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ........ ........ ...... .. Interest inco!e.................................................................

#5,' #5,'0 0

'6',5#

#5,'0







&eferred &eferred re1enue fro! .............................. ............................................. ............................. .............. 2,000,000 2,000,000 4e1enue fro! ...................................................... ...... ...... ....... ..... Initial Franchise Franchise fee.......... ..................... .......... ..................... ................... .............. .......... .......... ........ ...P6,000,000 P6,000,000 Deficiency ar!et "al#e of costs costs $P%80,000  &0'( &0'( ) %0 yrs.................$ 2,000,000 yrs.................$ 2,000,000 (

2,000,000

*+#ste+ initial initial fee $re"en#e(......... $re"en#e(................... .................... .................... ..................... ................ ..... P-,000,000 $uly $uly "5: *a Contin Continui uing ng e8ens e8enses. es...... .......... .......... .......... .......... .......... .......... ......... ......... ........... ............... ........... Cash  7ccounts ayable...................................................

"%0,00 "%0,000 0

*b &eferr &eferred ed re1enu re1enuee fro! fro! ... ....... ......... .......... .......... ........... ............... ................. ............... ....... 4e1enue fro! C........................................................... *P"%0,000  0/ P#$b%&' 11 ( 5 *+#ste+ initial initial franchise fee: fee : Total initial ...... .......... ...... ........ .......... .......... ...... ........ .......... .......... .......... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... Less: ace DarEet 1alue of Eitchen eFui!ent....... ...... ...... ...... ...... ...... ....... ....

#00,00 #00,000 0

a

"%0,000

7dAusted initial ... ....... ...... ........ .......... .......... .......... ...... ........ .......... .......... ...... ........ .......... .......... .......... ...... .... 4e1enues: Initial ..... ....... .... .... .... ........ .......... ...... ........ .......... .......... ...... ........ .......... .......... .......... ...... ........ .......... .......... ...... .... .... .. ?ale of of Ei Eitchen eF eFui!ent.............................................. ...... ...... ....... ...... ... Continuing . .. *P *P#,000,000 8 #/.............................. ...... ....... ...... ...... .....

b

#00,000

P2,500,00 ,000 _",%00,000 P#,600,00 ,000 P#,600,00 ,000 ",%00,000 ___20,000

Total. ..... ...... .... .... .... ........ .......... .......... ...... ........ .......... .......... ...... ........ .......... .......... .......... ...... ........ .......... .......... ...... .... .... .. =8enses: Initial e8enses............................................................................P 500,000 Cost Cost of Eitch Eitchen en eFui! eFui!ent ent.... ......... .......... .......... .......... .......... ......... ......... .......... .......... .......... ........... ...... ",500, ",500,000 000

2,520,00 ,000

_#,000 _#,000,00 ,000 0

>et inco!e.... .... ............ .. .................... .................... .................... .................... ..................... ..................... ................ ........

P#,520,000

o#rnal /ntries $an. $an. #: Cash. Cash. ............... .................... .......... .......... .......... ......... ......... .......... .......... .......... .......... .......... .......... ......... .......... ...... ",500, ",500,000 000 >otes recei1able.................. .................... .......... .................... ..................... .................... ......... ',000,000 &eferred re1enue fro!  *adAusted ?G......................... 4e1enue fro!  *DarEet 1alue of eFui!ent................

#,600,000 ",%00,000







Cash Cash  7ccoun 7ccountt recei1 recei1abl able... e....... ......... .......... .......... .......... ......... ......... .......... .............. .................. ......... 4e1enue fr fro! co continuing  ............................................

20,000 20,000 20,000

&eferred &eferred re1enue fro! .............................. ............................................. ............................. .............. #,600,000 #,600,000 4e1enue fro! ........................................................ ...... ...... ...

#,600,000

P#$b%&' 11 ( 6

Reco1nition of initial initial franchise franchise fee $IFF( $6 os. after openin1( openin1( 4e1enue fro! initial : Total initial initial ..... ............................. ........................................... ............................. ............................. ....................P#,500,00 ......P#,500,000 0 Less Less:: &efi &efici cien ency cy in cont contin inui uing ng  *?ch *?ch.. "... "...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... "0, "0,00 000 0 =8ense *c *costs of of in initial se ser1ices... ..... ........ .......... ...... ........ .......... .......... .......... ...... .... .... .... .... .... .... .... .... .... .... .... ....

#,'2 #,'20, 0,00 000 0 __600,00 ,000

>et inco!e....... inco!e.... ...... ..... ...... .... ............ .. .................... .................... .................... .................... ..................... ..................... ................ ........

P",20,000

?chedule " @ -stimated deficienc( in  $%( 3r. of /stiate+ Contract Contin#in1 FF " # ' 2 5  6 %  "0

P##0,000 ##0,000 ##0,000 ##0,000 ##0,000 "50,000 "50,000 "50,000 0,000 0,000

$2( ar!et Val#e of Contin#in1 4er"ices P#50,000 #50,000 #50,000 "#5,000 "#5,000 "#5,000 "#5,000 "#5,000 "#5,000 "#5,000

$/)cess of 2 o"er %( Deficiency P '0,000 '0,000 '0,000 @ @ @ @ @ '5,000 __'5,000 P"0,000

"eco$nition of revenue from  and costs costs:







/)penses Initial e8enses @ Continuing e8ense 9thers

@ @ * 50,000 * %,000

Net Incoe

P "#,500

@

* 60,000 @ @

@ * ',000 @

P "#,000

P#"6,#00

P 56,20

 P252,00 8 "0/  P25,20 4che+#le % Cop#tation of initial FF to the reco1ni9e+ reco1ni9e+ : Total initial initial fee .......... .............. ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........... ............. ............. ......... Less: Less: Intere Interest st unea unearne rned d on the note.. note..... ..... ..... ...... ...... ...... ..... ..... ..... ..... ...... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ....... ....... ...... ..... .. 7 DarEet DarEet 1alue of in1entory in1entory.... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......... ....... J DarEet DarEet 1alue of eFui!ent eFui!ent.... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......... ............ ........... .... J &eficie &eficiency ncy in continuing continuing costs... costs....... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......... ........ .. C

7.

J.

P650,000 P650,000 * "25," "25,"00 00 * %0,000 %0,000 * #,500 * "65,#00 "65,#00 

7dAusted 7dAusted initial initial ......... ............. ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......... ............ .............. .......... ...

P#%6,#00 P#%6,#00

:nearne+ Interest Interest ace 1alue 1alue of the note.. note...... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......... ............ ............. ............. ....... Present 1alue *"#0,000 8 '.60%................. '.60%........................... ..................... ..................... .................... ..................... ................ ..... rounded

P00,000 P00,000 252,00

;nearned ;nearned interest.. interest...... ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......... ............. ............. ........... .....

P"25,"00 P"25,"00

ar!et "al#e of e;#ipent an+ in"entory in"entory:: =Fui!ent *P50,000  %0/. %0/.... ...... ...... ...... ...... ...... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ....... ....... ... In1ent In1entory ory.. .. ....... .......... ...... ...... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ...... ..... ..... ...... ...... ...... ...... ...... ...... ...... ..... ..... ...... ...... ...... ...... ....... ....... ...... ....... ....... ...

P #,500 %0,000 %0,000

Incoe fro fro 4ales /;#ipent

C.

In"entory

?ales Pr Price. .. .................................................. Cost............................................................. ""%,000

P#,500 50,000

P%0,000 %,000

P"2#,500

>et inco!e ........................... ..................................... ....................... .............

P"#,500

P"#,000

P #2,500

*nalysis of Contin#in1 Contin#in1 costs









Dates of Re"en#e Reco1nition............. Reco1nition............. .................... .......... .................... ................... ......... .. $anuar $anuary y "#, #00%.... #00%........ ......... .......... .......... .......... ......... ............ ................. .................. ........... .. $une $une ", #00%..... #00%......... ......... .......... .......... .......... .......... .......... ............ ................ ................. ............ .... $uly ", #00%.............. #00%............................ ............................. ........................................ ......................... $une $une '0, #00...... #00........... .......... .......... ......... ......... .......... ........... ............... .................. ............... ......

CHAPTER 11 - Franchise Accounting (Advanced Accounting - Guerrero)

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