FRANCHISE ACCOUNTING PROF.

MIRANDA#0013

PROBLEM 1: On January 1, 2014, SARIPULPY COMPANY sells a franchise to Mr. JAM for an initial franchise
fee of P4M. Upon signing the contract on the same day, Mr. JAM paid 50% of the said amount and the
balance shall be paid in 5 annual equal installments starting December 31, 2014. Mr. JAM issued an
interest bearing note for the said balance with interest rate of 10%.

1. How much is the franchise revenue if the franchisor has substantially performed all the services
required by the initial franchise fee, the down payment is nonrefundable, and the collection of the note
is reasonably assured? 4M
2. How much is the franchise revenue if the down payment is nonrefundable, the collectability of the
note is not reasonably assured and the franchiser has performed all the services? 2M
3. How much is the franchise revenue if the collectability of the note is reasonably assured, the down
payment is refundable, and the franchiser has to perform substantial services? ZERO
4. How much is the unearned franchise revenue if the franchisor has substantially performed all the
services required by the initial franchise fee, the down payment is refundable, and the collection of the
note is not reasonably assured? 4M

PROBLEM 2: CORCI COFFEE Company charges an initial franchise fee of P900,000 to Mrs. Mocha for the
right to operate as a franchisee of CORCI COFFEE. Of this amount P180,000 is payable when the agreement
is signed and the balance is payable in 4 equal installment payments. In return for the payment of initial
franchise fee, the franchisor will assist the franchisee to locate the site, supervise the construction activity
and provide bookkeeping services. The credit rating of the franchisee indicates that money can be
borrowed at 10%. The present value of an ordinary annuity factor is 3.16987.

1. How much is the franchise revenue if the down payment is refundable, the collectability of the note
is reasonably assured but the substantial services remain to be performed? ZERO
2. How much is the franchise revenue if the down payment is nonrefundable, the collectability of the
note is reasonably assured and there is substantial performance of services? 750,576.60
3. How much is the franchise revenue if the down payment is nonrefundable, the collectability of the
note is not reasonably assured and there is substantial performance of services? 180,000
4. How much is the franchise revenue if the down payment is nonrefundable, the collectability of the
note is not reasonably assured and there is substantial performance of services equivalent to the down
payment? 180,000
FRANCHISE ACCOUNTING PROF. MIRANDA#0013

PROBLEM 3: On January 3, 2015, Mr. ALEX CHAMP entered into a franchise agreement with PAPA JANS,
Inc. to sell PAPA JANS products. The agreement provides of an initial franchise fee Of P24,000,000 payable
as follows: P14,400,000 cash to be paid upon signing of the contract, and the balance in four equal annual
payments every December 31. Mr. CHAMP signs 10% interest bearing note for the balance. The
agreement further provides that the franchisor will assists the franchisee in locating the business site,
designing and supervising the construction of the building, and training of management and employees.
The agreement also provides that the franchisee must pay a continuing franchise fees equal to 8% of its
monthly gross sales.

On August 30, 2015, the franchisor completed the initial services required the contract al a costs of
P2,400,000. The franchisee commenced business operations on October 5, 2015. The 2015 gross sales
reported by the franchisee to the franchisor are: October sales P450,000; November sales P 480,000 and
December sales P370,000. In 2016, the franchisee reported total gross sales of P 5,350,000. The Operating
expenses for the year 2015 and 2016 are P 35,000 and P50,000, respectively.

REQUIREMENTS:
l. If the collectability of the note is REASONABLY ASSURED:
What is the Realized Gross profit from Initial Franchise Fee (RGP-IFF)? 21,600,000
What is the total revenue from franchise on December 31, 2015? 24,104,400
What is the interest income on December 31, 2015? 960,000
What is the unearned franchise revenue on December 31, 2015? ZERO
What is the Net income on December 31, 2015? 22,629,400
What is the total revenue from franchise on December 31, 2016? 428,000
What is the interest income on December 31, 2016? 720,000
What is the Net Income on December 31, 2016? 1,098,000

ll. If the collectability of the note is NOT REASONABLY ASSURED:

What is the Realized Gross profit from Initial Franchise Fee (RGP-IFF)? 15,120,000
What is the total revenue from franchise on December 31, 2015? 104,400
What is the interest income on December 31, 2015? 960,000
What is the unearned franchise revenue on December 31, 2015? 6,480,000
What is the Net income on December 31, 2015? 16,149,400
What is the total revenue from franchise on December 31, 2016? 2,160,000
What is the interest income on December 31, 2016? 720,000
What is the Net Income on December 31, 2016? 3,258,000
FRANCHISE ACCOUNTING PROF. MIRANDA#0013

PROBLEM 4: On January 1, 2015, MR. Chris Chu signed an agreement to operate as a franchisee of
Chattime for an initial franchise fee of P2.4M. Of this amount, P900,000 was paid when the agreement is
signed and the balance is payable in five annual payments beginning December 31, 2015. MR. Chu signed
a non-interest bearing note for the balance. Mr. Chu's credit rating indicates that it can borrow money at
12% interest for a loan of this type. The present value of an annuity at 12% for 5 periods is 3.60477. The
contract includes continuing franchise fee of 5%of the franchisee's gross sales, to be collected monthly.

On November 18, 2015, the franchisor substantially performed the initial services provided in the contract
at a cost of P297,215. The franchisee commenced operations on December I, 2015. The gross sales of Mr.
Chu for the month of December is P150,000. In 2.016, the franchisee reported total gross sales of
P1,350,000. The operating expenses totaled P 25,000 and P 30,000 for 2015 and 2016, respectively.

REQUIREMENTS:
l. If the collectability of the note is REASONABLY ASSURED:
What is the Realized Gross Profit from Initial Franchise Fee (RGP-IFF)? 1,684,216
What is the interest income on December 31, 2015? 129,772
What is the unearned franchise revenue on December 31, 2015? ZERO
What is the Net Income on December 31, 2015? 1,796,488
What is the total realized gross profit from initial franchise fee on December 31, 2016? ZERO
What is the interest income on December 31, 2016? 109,344
What is the Net Income on December 31, 2016? 146,844

ll. If the collectability of the note is NOT REASONABLY ASSURED:

What is the Realized Gross Profit from Initial Franchise Fee (RGP-IFF)? 909,694
What is the interest income on December 31, 2015? 129,772
What is the unearned franchise revenue on December 31, 2015? ZERO
What is the Net Income on December 31, 2015? 1,021,966
What is the total realized gross profit from initial franchise fee on December 31, 2016? 162,057
What is the interest income on December 31, 2016? 109,344
What is the Net Income on December 31, 2016? 308,902

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