PROBLEMS 1. On January 1, 2018, Starbucks Company signed an agreement to operate as a franchisee of Perfect Pizza, Inc. for an initial franchise fee of P1,600,000 for a period of ten (10) years. Of this amount P600,000 was paid when the agreement was signed and the balance payable in five annual payments of P200,000 beginning December 31,2018. Starbucks signed a non-interest bearing note for the balance. Starbucks's rating indicates that it can borrow money at 20% for a loan at this type. In return for the initial fee, the franchisor agrees to make market studies, find a location, train the employees, and perform other related services. The following transactions describe the relationship with Perfect Pizza, a franchisee: 2018 Jan. 1: Entered into a franchise agreement. April 1: Completed a market study at cost of P54, 436. Indirect cost of services (general expenses), P5,000. May 15: Found suitable location. Service cost of P280,000. Nov. 15: Completed training program for employees, cost P20,000. Dec. 20: Franchise outlet opened and business operations started. Dec. 31: received the first annual payment. Required: Prepare all entries on the books of the franchisor for 2018, assuming the collection of the note is reasonably assured. 33 2. On September 1, 2018, Tim Hortons Company entered into franchise agreements with three franchisees. The agreement required an initial fee payment of P70,000 plus four (4) P30,000 payments due every 4 months, the first payment due December 31, 2018. The interest rate is 12%. The initial deposit is refundable until substantial performance has been completed. The following table describes each agreement. Services performed Total cost Probability by Franchiser at Incurred to Franchisee Full Collection December 31, 2018 December 31, 2018 A Likely Substantially P70,000 B Doubtful 25% 20, 000 C Doubtful Substantially 100,000 For each franchisee, identify the revenue recognition method that you would recommend considering the circumstances. Prepare the journal entries on the books of Tim Hortons Company to account the franchise. Assume P100,000 was received form each franchisee during the year