FRANCHISING

1. On January 1, 2015, Evie Company signed an agreement to operate as a franchisee of St. Mark Cafe for an initial
franchise fee of P937,500 for 7 years. Of this amount, P175,000 was paid when the agreement was signed and the
balance payable in four annual payments beginning on December 31., 2015. Evie signed a non-interest bearing note for
the balance. Evie's rating indicates that borrow money at 16% for the loan of this type. Assume that substantial services
amounting to P283,500 had already been rendered by St. Mark Cafe and that additional indirect franchise cost of
P25,500 was also incurred. (Round PV factor to 2 decimal places).

If the collection of the note is not reasonably assured, the net income for the year ended December 31, 2015 is

2. On December 31, 2015, Mack Do authorized to grant Michael & Company to operate as a franchisee for an initial fee
of P150,000. Of this amount, P60,000 was received upon signing the agreement and the balance, represented by a note,
is due in three annual payments of P30,000 each beginning December 31, 2016. The present value on December 31,
2015 of the three annual payments appropriately discounted is P72,000. According to the agreement, the non-
refundable down payment represents a fair measure of the services already performed by Mack Do however;
substantial future services are required of Mack do. Collectability of the note is reasonably certain.

Mack Do's December 31, 2015 Balance Sheet, unearned franchise fees should be reported as

December 31, 2015 The Fast Track, Inc. charges an initial franchise fee of P4,500000 for the right to operate as a
franchise fee of Fast Track. Of this amount, 1500,000 is collected. The balance is collectible in four annual Installments of
P1,000,000 each every December 31, starting 2016. The PV of 1 for 4 periods at 10% is .6830 while the PV of an annuity
of 1 for 4 periods at 10% is 3.1699.

January 2016 - The franchisor visited the proposed site and gave the go signal to start the construction of the building

June 1, 2016 - Started training the manpower

July 1, 2016 - The franchise started its operation.

December 31, 2016 - The first annual payment was received and the franchisee reported total sales of
P2,500,000.

The franchisor incurred P250,000 in relation to this franchise. Other terms of the agreement include a continuing royalty
fee equal to 5% of annual gross sales.

3. The entry to record the above activity on December 1, 2015 was:

4. Assuming the initial down payment is not refundable and the collectability of the note is assured, the amount of
revenue recognized on December 31, 2015 is:

5. The total revenue to be recognized by Fast Track, Inc on December 31, 2016 assuming the collectability of the note is
reasonably assured amounted to:
Lighthouse Company sells a franchise that requires an initial franchise fee of P70,000. A down payment of P20,000 cash
is required with the balance covered by the issuance of a P50000, 10% notes payable by the franchisee in five annual
equal installments.

All the material services have been substantially performed by the franchisor, and the refund period has expired, but the
collectability of the note is not reasonably assured.

6. The (1) earned and (2) unearned franchise revenue at the opening of the outlet is

Henlin Food Inc. charges an initial franchise fee of P500,000 for the right to operate as a franchisee. Of this amount,
P100,000 is payable when the agreement was signed and the balance is a non-interest bearing note in five annual
payments of P80,000 each. In return for the initial franchise fee, the franchisor will help locate the site, supervise the
construction and training of store crews. The credit rating of the franchisee indicates that the money can be borrowed at
8%. The present value of an ordinary annuity of five annual receipts of P80.000 is P319,416.80. The discount represents
the interest revenue to be accrued by the franchisor over the payment period. The probability of refunding the initial fee
is extremely low, the franchisor had already performed substantial services as required by the contract, and
collectability of the note is reasonably assured.

7. The earned and unearned franchise fee would be

Reyes Barbecue charges an initial franchise fee of P200,000, with P50,000 paid when the agreement was signed on
January 1, 2015 and the balance in two annual payments starting December 31, 2015. The P50,000 is non-refundable.
The present value factor of an ordinary annuity discounted at 12% for 2 periods is P1.6901. Reyes Barbecue has
substantially provided the services required and collectability of the note is reasonably assured. Reyes Barbecue is also
entitled to a 5% of gross sales as Royalty fee. During 2015, the franchisee reported a total sales of P1.2M.

8. The total revenue that Reyes Barbecue should recognize at December 31, 2015 is:

On September 30, 2015 Heaven& Egg entered into franchise agreement with Manuel. The agreements required an initial
franchise fee of P175,000 plus four P75,000 payments due every three months, the first payment due December 31,
2015 The interest rate is 12%. The initial deposit is no longer refundable if services performed have been 25%
completed. The following table describes the agreement.

Franchisee Probability of Collection Services Performed at 12/31/15 Total Cost Incurred 12/31/15

Manuel Likely Substantially 35,000

The present value factors at 3% for four periods were as follows:

Present value of P1, - .0885

Present value of an annuity of P1, - 3.7171

9. The net total revenue to be recognized by Heaven & Egg in 2015 is