Revenue Recognition:

Franchise Accounting

Marvin P. San Juan 03/13/2013

Franchising
A system whereby one company grants business rights to another company or individual through a contract to operate a franchised business for a specified period of time. FRANCHISOR FRANCHISEE

Marvin P. San Juan 03/13/2013

Franchise fees
Initial franchise fees
Cash / Downpayment Promissory notes / Notes Receivable

Continuing franchise fees

Marvin P. San Juan 03/13/2013

Criteria on Franchise Revenue Recognition

1. Substantial performance of the services 2. Period of refund has expired. 3. Collectibility of the note is reasonably assured.

Marvin P. San Juan 03/13/2013

Criteria

Revenue Recognized?

1
Substantial Performance?

2
Period of refund expired?

3
Reasonably assured? Downpayment Notes

x x

x x x

Marvin P. San Juan 03/13/2013

Problem

On January 3, 2013, DWCC Inc. authorized DLC Inc. to operate as a franchisee over a twentyyear period for an initial franchise fee of P75,000.00. Of this amount, P30,000.00 was received upon signing the agreement, and the balance, represented by a note is due in three annual payments beginning January 1, 2014. The present value on January 1, 2013 of the three annual payments appropriately discounted as p36,000.00. DLC commenced operations on July 1, 2013. For the year ended December 31, 2013, how much should DWCC record as revenue from franchise fees in respect of the DLCs franchise?
Marvin P. San Juan 03/13/2013

Journal Entry:
Cash Notes Receivable Unearned Interest Income Franchise Revenue 30,000.00 45,000.00 9,000.00 66,000.00

Marvin P. San Juan 03/13/2013

Problem

On January 3, 2013, DWCC Inc. authorized DLC Inc. to operate as a franchisee over a twentyyear period for an initial franchise fee of P75,000.00. Of this amount, P30,000.00 was received upon signing the agreement, and the balance, represented by a note is due in three annual payments beginning January 1, 2014. The present value on January 1, 2013 of the three annual payments appropriately discounted as p36,000.00. DLC commenced operations on July 1, 2013. For the year ended December 31, 2013, how much should DWCC record as revenue from franchise fees in respect of the DLCs franchise?
Marvin P. San Juan 03/13/2013

Problem

On January 3, 2013, DWCC Inc. authorized DLC Inc. to operate as a franchisee over a twentyyear period for an initial franchise fee of P75,000.00. Of this amount, P30,000.00 was received upon signing the agreement, and the balance, represented by a note is due in three annual payments beginning January 1, 2014. The present value on January 1, 2013 of the three annual payments appropriately discounted as p36,000.00. If all the material services have been performed and collectibility of the notes is reasonably assured, but the refund period has not yet expired. How much is the franchise revenue?
Marvin P. San Juan 03/13/2013

Journal Entry:
Cash Notes Receivable Unearned Interest Income Unearned Franchise Revenue 30,000.00 45,000.00 9,000.00 66,000.00

Marvin P. San Juan 03/13/2013

Problem

On January 3, 2013, DWCC Inc. authorized DLC Inc. to operate as a franchisee over a twentyyear period for an initial franchise fee of P75,000.00. Of this amount, P30,000.00 was received upon signing the agreement, and the balance, represented by a note is due in three annual payments beginning January 1, 2014. The present value on January 1, 2013 of the three annual payments appropriately discounted as p36,000.00. If all the material services have been performed and collectibility of the notes is reasonably assured, but the refund period has not yet expired. How much is the franchise revenue?
Marvin P. San Juan 03/13/2013

Problem

On January 3, 2013, DWCC Inc. authorized DLC Inc. to operate as a franchisee over a twentyyear period for an initial franchise fee of P75,000.00. Of this amount, P30,000.00 was received upon signing the agreement, and the balance, represented by a note is due in three annual payments beginning January 1, 2014. The present value on January 1, 2013 of the three annual payments appropriately discounted as p36,000.00. According to the agreement, the nonrefundable downpayment represents a fair measure of the services already performed by DWCC, however substantial future services are required.. How much is the franchise revenue?

Marvin P. San Juan 03/13/2013

Journal Entry:
Cash Notes Receivable Unearned Interest Income Franchise Revenue Unearned Franchise Revenue 30,000.00 45,000.00 9,000.00 30,000.00 36,000.00

Marvin P. San Juan 03/13/2013

Consideration to compute income

Franchise Revenues (IFF + CFF) Other Income (e.g. Interest Income) Direct cost Indirect Cost

Marvin P. San Juan 03/13/2013

On January 1, 2013, LEGO entered into a franchise agreement with TOY Inc. to sell their products. The agreement provides for an initial franchise fee of P1,500,000 which is payable as follows: P500,000 cash to be paid upon signing the contract, and the balance in four equal annual installments every December 31, starting in 2011. The credit rating of the franchisee indicates that the money can be borrowed at 10% for 4 periods is 3.1698. The agreement further provides that the franchisee must pay a continuing franchise fee equal to 5% of its monthly gross sales. TOY incurred direct cost of P465,282 and indirect costs of P83,700. The franchisee started business operations on July 1, 2013 and was able to generate sales of P620,000 for 2013. The first installment was made on due date. How much is the net income of the franchisor for the year ended December 31, 2013?

Marvin P. San Juan 03/13/2013

COMBO A
Interest Bearing Note Collection is Reasonably Assured

COMBO B
Interest Bearing Note Collection is Not Reasonably Assured

COMBO C
Non-Interest Bearing Note Collection is Reasonably Assured

COMBO D
Non-Interest Bearing Note Collection is Not Reasonably Assured

Marvin P. San Juan 03/13/2013

COMBO A Interest-Bearing Note Collection is Reasonably Assured Franchise Revenues: Initial Franchise Fee: Downpayment Installment payment Less: Direct Cost Gross Profit Continuing Franchise Fee P P 500,000.00 1,000,000.00 P 1,500,000.00 465,282.00 1,034,718.00

5% x P620,000.00
Total Franchise Revenue Add: Interest Income Total Revenue Less: Indirect Cost Net Income P P P

31,000.00
1,065,718.00 100,000.00 1,165,718.00 83,700.00 1,082,018.00

Marvin P. San Juan 03/13/2013

COMBO B Interest-Bearing Note Collection is Not Reasonably Assured Franchise Revenues: Initial Franchise Fee: Downpayment Installment payment Less: Direct Cost Gross Profit Realized Gross Profit Downpayment First Installment Total Collection GP Rate Continuing Franchise Fee 5% x P620,000.00 Total Franchise Revenue Add: Interest Income Total Revenue Less: Indirect Cost Net Income

500,000.00 1,000,000.00

P P

1,500,000.00 465,282.00 1,034,718.00

69%

P P

500,000.00 250,000.00 750,000.00 69%

517,500.00 31,000.00 548,500.00 100,000.00 648,500.00 83,700.00 564,800.00

P P P

Marvin P. San Juan 03/13/2013

COMBO C Noninterest-Bearing Note Collection is Reasonably Assured Franchise Revenues: Initial Franchise Fee: Downpayment PV of Installment payment P250,000.00 x 3.1698) Less: Direct Cost Gross Profit Continuing Franchise Fee 5% x P620,000.00 Total Franchise Revenue Add: Interest Income Total Revenue Less: Indirect Cost Net Income

500,000.00 792,450.00 P P 1,292,450.00 465,282.00 827,168.00 31,000.00 858,168.00 79,245.00 937,413.00 83,700.00 853,713.00

P P P

Schedule of Installment Payment Date 1-Jan-13 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 Collection Interest Income 79,245.00 62,169.50 43,386.45 22,749.05 Principal Balance 792,450.00 621,695.00 433,864.50 227,250.95 -

250,000.00 250,000.00 250,000.00 250,000.00

170,755.00 187,830.50 206,613.55 227,250.95

Marvin P. San Juan 03/13/2013

COMBO D NonInterest-Bearing Note Collection is Not Reasonably Assured Franchise Revenues: Initial Franchise Fee: Downpayment PV of Installment payment P250,000.00 x 3.1698) Less: Direct Cost Gross Profit Realized Gross Profit Downpayment First Installment Total Collection GP Rate Continuing Franchise Fee 5% x P620,000.00 Total Franchise Revenue Add: Interest Income Total Revenue Less: Indirect Cost Net Income

500,000.00 792,450.00 P P 1,292,450.00 465,282.00 827,168.00

64%

P P

500,000.00 170,755.00 670,755.00 64%

429,283.20 31,000.00 460,283.20 79,245.00 539,528.20 83,700.00 455,828.20

P P
P

Schedule of Installment Payment Date 1-Jan-13 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 Collection Interest Income 79,245.00 62,169.50 43,386.45 22,749.05 Principal Balance 792,450.00 621,695.00 433,864.50 227,250.95 -

250,000.00 250,000.00 250,000.00 250,000.00

170,755.00 187,830.50 206,613.55 227,250.95

Marvin P. San Juan 03/13/2013