Problem
I. 3-IN-1 COFFEE COMPANY charges an initial franchise fee of P 900,000 to Mrs. Fely Nimfa for the right to operate as a franchisee of 3-IN-1 COFFEE COMPANY. Of this amount P 180,000 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 the money can be borrowed at 10%. The present value of an ordinary annuity factor is 3.16987.
Task
i. 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?
ii. How much is the franchise revenue if the down payment is non-refundable, the collectability of the note is reasonably assured and there is substantial performance of services?
iii. How much is the franchise revenue if the down payment is non-refundable, the collectability of the note is not reasonably assured and there is substantial performance of services?
iv. How much is the franchise revenue if the down payment is non-refundable, the collectability of the note is not reasonably assured and there is substantial performance of services equivalent to the down payment?
II. On November 1, 2016, a franchisee bought a franchise from Mx Turkey for sales price of 5M to sell Mx Turkey's products for a period of 20 years. Their agreement provides that P 500T will be paid in advance and the balance in 5 equal annual installments, evidenced by a 9% promissory note; and Mx Turkey will be responsible in making the feasibility study of the project and 6 months training of the franchisee's staff and employees. The present value factors for the 9% rate follow:
PV of P 1 for 5 periods 0.650
PV of annuity of P 1 for 5 periods 3.890
PV of annuity of P 1 for 5 periods (in advance) 4.240
Assuming collection of the note is reasonably assured, what is the amount of franchise revenue should Mx Turkey recognize for the year ended 12/31/16?
III. Each of PORR Pie Co.'s 21 new franchisee contracted to pay an initial franchise fee of P 30,000. By December 31, 2016, each franchisee had paid a non-refundable P 10,000 fee and signed a note to pay P 10,000 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 franchise fee will be performed in 2017. What amount of net unearned franchise fees would PORR report at 12/31/16?
If a franchise becomes worthless prior to the end of its estimated useful life, the unamortized balance in the franchise account should be written off as a(an):
i. Prior period adjustment.
ii. Impairment loss
iii. Expense in the current period.
iv. Change in estimate.
IV. Hot Pizza granted a franchise to Shake King. Shake King was to pay a franchise fee of P 100,000 payable in five equal annual installments starting with the payment upon signing of the agreement. The franchisee was to pay monthly 1% of gross sales of the preceding month. Should the operation of the outlet prove to be unprofitable, the franchise may be cancelled with whatever obligation owing Hot Pizza, in connection with the P 100,000 franchise fee, waived. The first year of operations generated a gross sales of P 500,000. For the first year, Hot Pizza earned franchise fee of?
V. Krebs Crabs, Inc. franchisor, entered into a franchise agreement with Liwayway Ligaya, franchisee, on July 1, 2016. The total franchise fees agreed upon is P 1,100,00 of which P 100,000 is payable upon signing and the balance payable in four equal annual installments, it was agreed that the down payment is not refundable, notwithstanding lack of substantial performance of services by franchisor. When Krebs prepares its financial statements on July 31, 2016, the unearned franchise fees to be reported is
VI. On November 1, 2016, GSW, Inc. authorized Steve Kerr to operate a franchisee for an initial franchise fee of P 1,500,000. Of this amount, 40% was received upon contract signing and the balance, represented by a note, is due in three annual installments starting December 31, 2016. A 65-day period of refund was granted. According to the agreement, the down payment represents a fair measure of the services initially performed. The collectability of the note is reasonably certain. PV factor of 2.4. What is the unearned franchise fee at December 31, 2016?