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PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. On July 1, 20x1, Wash Co. grants a franchisee the right to sell Wash Co.'s products in a specific market over a period of 10 years. The franchise contract requires an upfront fee ofaccounting for Franchise Operations - Franchisor until 403 the p800,000, which includes P100,000 for equipment that Wash Co, will provide to the franchisee. The amount reflects the stand-alone selling price of the equipment, In addition, the franchisee will pay a 10% sales-based royalty. Wash Co. has o grant a granted similar rights to other franchisees in other locations. 1 Native's Wash Co. regularly undertakes activities that promote the o provide brand name nationally. Wash delivers the equipment to the franchisee on July 15, 20x1. The franchisee starts selling the tore. The products on August 1, 20x1 and reports total sales of P600,000 5% sales- for the year. How much total revenue is recognized from the payment contract in 20x1? rice of the a. 860,000 c. 213,259 eloped a b. 760,000 d. 189,167 such as lementing 2. On January 1, 20x1, Baguio Beans, a well-known basketball campaigns team, licenses the use of its name and logo to a customer. The ne. Native customer, an apparel designer, has the right to use Baguio 20x1. The Beans' name and logo on items including t-shirts, caps, mugs , 20x1, at and towels for two years. In exchange for providing the license, Baguio Beans will receive a fixed consideration of franchisee P200,000 and a royalty of 20% of the sales price of any items using the team name or logo. The customer expects that Baguio Beans will continue to play games and provide a competitive team. The license is transferred to the customer at contract inception. The customer reports sales of P1,000,000 for how these the year. How much revenue will Baguio Beans recognize from the contract in 20x1? c. 200,000 a. 400,000 d. 100,000 b. 300,000 ct. (FRS 15.IE309-313 - Adapted) 3. On January 1, 20x1, Feedback, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted orchestra. The customer, a consumer products NAL company; has the right to use the recorded symphony in all right to sell commercials, including television, radio and online period of 10 ont fee ofadvertisements for 2 years in the Philippines. In exchange for providing the license, Feedback receives a fixed consideration of P 10,000 per month. The contract does not include any other goods or services to be provided by Feedback. The contract is non-cancellable. The license is transferred to the customer on January 1, 20x1. The appropriate discount rate is 12% How much contract revenue (excluding interest revenue) will Feedback recognize in 20x1? c. 202,806 a. 120,000 b. 240,000 d. 212,434 (IFRS 15.18303-306 . Adapted) 6. U Use the following information for the next four questions: m On December 31, 20x1, Mr. Eugene H. Krabs Co. enters into a a. contract with Sheldon J. Plankton Co. to transfer a license for a b. fixed fee of P100,000 payable as follows: . 20% upon signing of contract. 7. Th 80% in 4 equal annual installments starting December 31, 20x2. (K The appropriate discount rate is 12%. of 4: The license provides Plankton rights over Mr. Krabs' patented per secret formula for a burger patty. Plankton continues to res operate using its trade name and has the discretion of the developing a new product name for the products it will the produce using the secret formula. The license does not cha explicitly require Mr. Krabs to undertake activities that will reg significantly affect the intellectual property to which Plankton rese has rights. Neither does Plankton expect that Mr. Krabs will sup undertake such activities. Mr. Krabs provides the secret all formula to Plankton on December 31, 20x1. How much com contract revenue will Krabs recognize in 20x1? muc a. 60,747 a b. 79,132 c. 80,747 b. d. 0 5. The license provides Plankton rights over Mr. Krabs' patented 8. An e secret formula for a burger patty. The agreement requires imag comiFranchisor ge for eration 405 other Plankton to discontinue using its trade name and instead use tract is Mr. Krabs trade name for a period of four years, Plankton is ner on bound by the terms of the contract to abide with Mr. Krabs' How policies on the use of the secret formula but is given the right to any subsequent modifications to the secret formula. Mr. will Krabs provides the secret formula to Plankton on December 20x1? 31, 20x1. How much contract revenue will Krabs recognize in a. 20,187 b. 60,747 C. 80,747 d. 0 6. Using the information in the immediately following item, how into a much total revenue will Krabs recognize in 20x2? for a a. 20,187 C. 80,747 b. 27,477 d. 0 20x2. 7. The license grants Plankton rights over Mr. Krabs' trademark (Krusty Krab @) and related proprietary processes for a period of ten years. The franchise agreement requires Mr. Krabs' to perform initial services to assist Plankton in opening the new tented restaurant. These include provision of written guidelines on ues to the standard layout, design, decoration and color scheme of ion of the restaurant and provision of training. No separate fees are it will charged for these services. Moreover, the franchise agreement es not requires Mr. Krabs to continually undertake activities, such as at will research and development and marketing campaigns, to ankton support the franchise name. Mr. Krabs substantially performs bs will all the initial services on December 31, 20x1. Plankton secret commences business operations on January 3, 20x2. How much much total revenue will Krabs recognize in 20x2? C. 60,747 a. 15,365 d. 0 b. 27,477 3. An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of its atented comic strips to a customer for a four-year term. There are main equires406 Chapter 8 characters involved in each of the comic strips. However 10. newly created characters appear regularly and the images of the characters evolve over time. The customer, an operator of cruise ships, can use the entity's characters in various ways, Fran such as in shows or parades, within reasonable guidelines. The contract requires the customer to use the latest images of the characters. In exchange for granting the license, the entity C receives a fixed payment of P1 million in each year of the four- Town year term. The entity determines that the contract does not contain a significant financing component. How much Addition revenue is recognized in Year 1 of the contract? c. 3,169,865 The a. 1,000,000 b. 4,000,000 d. 0 con (IFRS 15: IE299-302 - Adapted) . The inst 9. On Jan. 1, 20x1, Knock Co. enters into a contract with a At d customer to transfer a license for a fixed fee of P100,000 price payable as follows: 20% at contract inception and balance due Fran in 4 equal annual installments starting Dec. 31, 20x1. The value discount rate is 12%. At contract inception, Knock determines The n that there is significant uncertainty in the collectability of the to use note, and that the nature of the promise to grant the license is . Water to provide the customer with the 'right to use' Knock's intellectual property as it exists at grant date. Knock transfers How mud the license to the customer, and incurs direct contract costs of in 20x1? P20,000, on Jan. 1, 20x1. How much contract revenue and contract costs are recognized and expensed, respectively, in a. 74, 20x1? b. 76,9 Contract revenue Contract costs a. 80,747 20,000 PROBLEM b. 20,187 5,000 INSTRUCT C. 20,000 20,000 J. Find a st d. 0 0 Imagine Read the requiremeAccounting for Franchise Operations - Franchisor 407 er, 10. Water Co. enters into the following three franchise agreements on July 1, 20x1: of of Probability of Cash Franchisee Present Direct ys, collection down value of costs payment es. note Reasonably assured incurred 20,000 of 60,747 B Uncertain 32,000 20,000 48,037 ity 25,000 C Significantly uncertain 20,000 33,801 21,520 ur- Totals 60,000 142,585 78.520 not ch Additional information: . The down payments are non-refundable and are due at contract inception. . The discount rate on all the notes is 12% and the first installment payments are due on July 1, 20x2. . At contract inception, Water expects to provide Franchisee B a a price concession and concludes that it is probable that 100 Franchisee B will pay half of the note. The adjusted present ue value of the note is P24,018. The discount rate is 12%. he . The nature of the licenses is to provide the customers the 'right hes to use' Water's intellectual property as it exists at grant date. the . Water transfers the licenses to the customers on July 1, 20x1. e is k's How much is the total profit recognized from the three contracts ers of in 20x1? c. 78,312 Ind a. 74,879 d. 80,921 in b. 76,982