solution manual chapter 9

8/10/2019 Solution Manual Chapter 9

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Chapter 9

Problem I1. Jollibee has substantially performed all material services, the refund period has

expired, and the collectibility of the note is reasonably assured. Jollibee recognizesrevenue as follows:

Cash.. !","""#otes receivable. $"","""

%ranchise revenue.. &!","""

. 'he refund period has expired and the collectibility of the note is reasonablyassured, but Jollibee has not substantially performed all material services. Jollibeedoes not recognize revenue, but instead recognizes a liability as follows:

Cash.. !","""#otes receivable. $"","""

(nearned franchise revenue.. &!","""

%ranchisor will recognize the unearned franchise fees as revenue when it hasperformed all material services, the ad)usting entry to record the revenue then wouldbe:

(nearned franchise revenue... &!",""" %ranchise revenue.. &!","""

*. Jollibee has substantially performed all services and the collectibility of the note isreasonably assured, but the refund period has not expired. Jollibee does notrecognize revenue, but instead recognizes a liability as follows:

Cash.. !","""

#otes receivable. $"","""

(nearned franchise revenue.. &!","""

'he franchisor will recognize the unearned franchise fees as revenue when therefund period expires, the ad)usting entry to record the revenue then would be:

(nearned franchise revenue... &!","""

%ranchise revenue... &!","""

!. Jollibee has substantially performed all services and the refund period has expired,but the collectibility of the note is not reasonably assured. Jollibee recognizes revenueby the installment or cost recovery method. +f we assume that Jollibee uses theinstallment method, it recognizes revenue of !",""" as follows:

Cash.. !","""#otes receivable. $"",""" %ranchise revenue.. !","""

(nearned franchise revenue $"","""

'he franchisor is using the installment method, it recognizes the unearned franchisefees as revenue in the amount of 1",""" each year as it receives cash assumingthere is no cost of franchise, the entry would be as follows:


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(nearned franchise revenue 1","""

%ranchise revenue.. 1","""

'his revenue recognition may be true only in the event there is no cost of franchise atall. -n the other hand, it may be somewhat misleading since under the installmentsales method gross pro/t is earned or realized thru collections.

0. 'he refund period has expired, but Jollibee has not substantially performed all

services and there is no basis for estimating the collectibility of the note. Jollibee

does not recognize the note as an asset. +nstead, it uses a form of the deposit

method. %or example, suppose Jollibee has developed an entirely new product

whose success is uncertain and the franchisee will pay the note from the cash

2ows from the sale of the product, if any. Jollibee records the initial transaction as

follows:

Cash.. !","""

(nearned franchise revenue.. !","""

'he franchisor may recognize the unearned franchise fees as revenue under theaccrual method in the normal manner at the completion of the services to beperformed 3if collectibility is reasonably assured4, the ad)usting entry to record therevenue then would be:

(nearned franchise revenue... !",""" %ranchise revenue... !","""

5lternatively, it may recognize revenue under the installment method if it has no basisfor estimating the collectibility of the note.

$. #ow assume that Jollibee has earned only *$",""" from providing initial services,with the balance being a down payment for continuing services. +f the refund

period has expired and the collectibility of the note is reasonably assured, Jollibeerecognizes revenue of P360,000 as follows:Cash.. !","""

#otes receivable. $"",""" %ranchise revenue.. *$","""

(nearned franchise revenue.. !&","""

'he franchisor recognizes the unearned franchise revenue of !&",""" as revenuewhen it performs the continuing services, the ad)usting entry to record the revenuethen would be:

(nearned franchise revenue... !&",""" %ranchise revenue... !&","""

+n all these cases except the /fth, the franchisor accounts for the collection of interestand principal on the note receivable in the usual manner. +n the /fth situation, it doesnot recognize the note and revenue until a future event occurs. +n addition, thefranchisor accounts for its costs in the same way as its revenue recognition. 'hat is, ifit defers revenue, then it defers the related cost of goods sold. 'hen, when itrecognizes revenue, it matches the cost of goods sold against the revenues. 'hefranchisee accounts for its payments as an intangible asset.


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6ometimes the franchisor collects the initial franchise fee far in advance of performingits services. 5t other times collection of part of the initial franchise fee is deferred untilthe franchise is operating successfully.

Problem II1.

Cash ......................................... 70,""" (nearned %ranchise %ee ..................... 70,""".

Cash ......................................... 70,"""#ote 8eceivable .............................. 1",""" (nearned +.+. or 9iscount on #ote 8eceivable &,&&1 8evenue from %ranchise %ee ................. 1$$,11 ; ? 11$,11 3Table IVn ? !, i ? 1@4

*.

Cash ......................................... 70,"""#ote 8eceivable .............................. 1",""" (nearned +.+. or 9iscount on #ote 8eceivable &,&&1

8evenue from %ranchise %ee ................. 70,""" (nearned %ranchise %ee ..................... 1,11

Problem III1. +f there is a reasonable expectation that the down payment may be refunded and

substantial future services remain to be performed by izza, +nc., the entry should be:Cash.. 1","""."

"#otes receivable. !&","""."

" (nearned interest income 3or 9iscount on notesreceivable4

&",0&*."

(nearned franchise revenue.. !1,!1$,&"

. +f the probability of refunding the initial franchise fee is extremely low, the amount offuture services to be provided to the franchisee is minimal, collectibility of the note isreasonably assured, and substantial performance has occurred, the entry should be:Cash.. 1","""."



$,$.&!

%ranchise revenue.. 0"*,*"".1$

*. +f the initial down payment is not refundable, represents a fair measure of the servicesalready provided, with a signi/cant amount of services still to be performed by thefranchisor in future periods, and collectibility of the note is reasonably assured, the entryshould be:Cash.. 1","""."



$,$.&!


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%ranchise revenue.. 1",""".""

(nearned franchise revenue *&*,*"".1$

!. +f the initial down payment is not refundable and no future services are reAuired by thefranchisor, but collection of the note is so uncertain that recognition of the note as an

asset is unwarranted, the entry should be:

Cash.. 1",""".""

%ranchise revenue.. 1",""".""

Bhere the collection of the note is extremely uncertain, revenue thru gross pro/t isrecognized by means of cash collection using the cost recovery method.

0. +f the initial down payment is refundable or substantial services are yet to be performed,but collection of the note is so uncertain that recognition of the note as an asset isunwarranted, the entry should be:

Cash.. 1",""" (nearned franchise revenue.. 1","""

Bhere the collection of the note is extremely uncertain, revenue thru gross pro/t isrecognized by means of cash collection using the cost recovery method.

Problem IV1. +f the down payment is refundable, and no services have been rendered at the time the

arrangement is made, and collection on the note is reasonably certain, the entry shouldbe:

Cash.. 1",""".""

#otes receivable. 1&",""".""

(nearned interest income 3or 9iscount on notes receivable4 *7,*0!.0" (nearned franchise revenue.. $,$!0.0

"

. +nitial services are determined to be substantially performed, the refund period hasexpired and the collection of the note is reasonably assured, the full accrual methodwould be used. 5ssume that substantial performance of the initial services costs0,0.1 the entry should be:

Cash.. 1",""".""

#otes receivable. 1&",""".

"" (nearned interest income 3or 9iscount on notes receivable4 *7,*0!.0" %ranchise revenue.. $,$!0.0

"

Cost of franchise revenue 0,0.1"

Cash, etc 0,0.1"


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%ew months after, the collectibility of the note becomes doubtful or no reasonableassurance, the installment sales method could be used as a general rule. +n addition tothe entries above, following entries would be reAuired:

a. 'o setup cost of franchise: #o entry reAuired, already setup previously.

b. 'o defer gross pro/t on franchise: %ranchise revenue $,$!0.

0" Cost of franchise revenue 0,0.1" 9eferred gross pro/t on franchise 1",11$.!

"

c. 5d)ustments to recognize gross pro/t on franchise:9eferred gross pro/t on franchise $,"""."

" 8ealized gross pro/t on franchise $,""".""

%ranchise revenue.. $,$!0.0Dess: Cost of franchise revenue 0,0.1Eross pro/t.. 1",11$.!Eross pro/t rate 31",11$.!F$,$!0.04 &"@

Collections as to principal. 1",""".""

Gultiplied by: Eross pro/t rate. &"@

8ealized gross pro/t on franchise.. $,""".""

Problem V+f we assume that HCI+, whose /scal year ends on 9ecember *1, secures the lease andthe permits on %ebruary 1, "x0, and operations commence at that time, the following

)ournal entries would be appropriate:

July 1, "x*:Cash.. 1","""#otes receivable. !&",""" (nearned franchise revenue.. $"","""

9eferral of revenue recognition is reAuired when substantial performanceK of franchisorservices has not been completed. +t would call for deferral of revenue recognition untilevidence of service performance was available. 'he best evidence, of course, would bethe commencement of operations of the franchise outlet and at this point in time,revenue is recognized.

9uring "x*:9eferred cost of franchise revenue. *$",""" Cash.... *$","""

9ecember *1, "x*:+nterest receivable 3!&",""" x 1!@ x $F14.. **,$"" Cash.... **,$""

%ebruary 1, "x!:(nearned franchise revenue.. $"","""


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%ranchise revenue.. $"","""

Cost of franchise revenue.. *$",""" 9eferred cost of franchise revenue.. *$","""

Problem VI

8easonably 5ssured#o reasonable

assuranceJanuary 1, "x!

Cash.. 1,0"",""" 1,0"","""#otes receivable. !,0"",""" !,0"",""" (nearned franchise revenue. $,""",""" $,""","""

Receipt of initial franchise fee.

Conditions to be met: Cash #otes Cash #otes 6ervices #o #o #o #o eriod of refund Les Les Les Les

Collectibility

8easonablyassured

#oreasonableassurance

1F1F"x! Malance 1,0"",""" !,0"",""" 1,0"",""" !,0"",""" 6tatus Diability Diability Diability Diability

9ecember *1, "x!Cash.. 1,070,""" 1,070,""" #otes receivable. 1,10,""" 1,10,0"" +nterest income 3*,70",""" x 1"@4 !0",""" !0",""" Annual collection.

9eferred cost of franchise 1,&"",""" 1,&"",""" Cash 1,&"",""" 1,&"",""" To defer cost of franchise since substantial

services had not been performed.

-perating expenses 1",""" 1","""

Cash 1",""" 1",""" To record expenses.

Adjustments:Cost of franchise 1,&"",""" 9eferred cost of franchise 1,&"",""" To recognize cost of franchise.

(nearned franchise revenue. $,""",""" %ranchise revenue $,""",""" To recognize franchise revenue based onthe

following analysis:

Conditions to be met: Cash #otes

6ervices Les Les

eriod of refund Les Les

Collectibility8easonably

assured

1F1F"x! Malance.. 1,0"",""" !,0"","""


7/16

1F*1F"x!: Collection as toprincipal

1,10,"""

31,10,"""4

1F*1F"x! Malance ,$0,""" ,$0,"""

6tatus 8evenue 8evenue

Adjustments (Installment salesmethod)a. 'o setup cost of franchise: #o entryN

b. 'o setup deferred gross pro/t (nearned franchise revenue $,""",""" 9eferred cost of franchiserevenue 1,&"",""" 9eferred gross pro/t !,"","""

There are di!erent options on this matter" an entry may be made to set#up cost of franchise and eventually it willbe closed to set#up deferred gross pro$t. Regardless of the option" the ob%ective is to set#up deferred gross pro$t.Refer to Illustration ' for alternative treatment to set#up cost of franchise.

Conditions to be met: Cash #otes

6ervices Les Les eriod of refund Les Les

Collectibility

#oreasonabeassurance

1F1F"x! Malance.. 1,0"",""" !,0"","""

1F*1F"x!: Collection as to principal 1,10,""

"31,10,"""

41F*1F"x! Malance ,$0,""" ,$0,"""

6tatus8evenue O

+F6Gethod

Diability

c. 'o recognize realized gross pro/t on

franchise: 9eferred gross pro/t 1,&*7,0"" 8ealized gross pro/t on franchise 1,&*7,0""

(ollections ) principal x gross pro$t rate*+"'+,"--- x '"--- ) /"0--12'"--- 3 */"045",--

2.


assuranceInome !tatement, "#$3"$#0%&:%ranchise revenue 3accrual method4N $,""",""" "

Dess: Cost of franchise 3accrualmethod4N

1,&"",""" "

Eross pro/t on regular franchise

3accrual4N !,"",""" "5dd: Eross pro/t on franchise3installment

sales method4 "

N1,&*7,0""Eross pro/t on franchise !,"",""" 1,&*7,0""Dess: -perating expenses 1",""" 1","""

!,"&",""" 1,717,0""5dd: +nterest income.. !0",""" !0","""#et income. !,0*",""" ,1$7,0""


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Problem VII

1.


assurance

January 1, "x!Cash.. 1,!!",""" 1,!!","""#otes receivable. *,&!",""" *,&!",""" (nearned interest incomeN 7$,&$ 7$,&$ (nearned franchise revenue. !,!&*,1"! !,!&*,1"!

Receipt of initial franchise fee.

Conditions to be met: Cash #otes 3P4 Cash #otes 3P4 6ervicesNN #o #o #o #o eriod of refund O until date of

-pening #o #o #o #o

Collectibility

8easonablyassured


1F1F"x! Malance 1,!!","""*,"!*,1"!N

NN 1,!!","""*,"!*,1"!N

NN 6tatus Diability Diability Diability Diability

6nearned interest income or discount on notes receivable: *4"07-"--- ) *4"-74"/-7 3 *5&'"0&'. 8ervices had been substantially performed only on the date of opening which is 9ecember 0. Revenue is deferred

and subseuent direct cost of franchise should also be deferred.*&'-"--- x 4./'&& 3 *+",4,"&+-

%ebruary , "x!:

9eferred cost of franchise1!!,*1.

"1!!,*1.

" Cash 1!!,*1." 1!!,*1." To defer cost of franchise since substantial


June 1*, "x!:Eeneral expenses $",""" $",""" Cash $",""" $",""" To record expenses.

5ugust &, "x!:9eferred cost of franchise *$",""" *$",""" Cash *$",""" *$",""" To defer cost of franchise since substantial


#ovember , "x!:9eferred cost of franchise &!",""" &!",""" Cash &!",""" &!",""" To defer cost of franchise since substantial


#ovember , "x!: 6ubstantial completion of services.

9ecember *1, "x!:Cash.. $",""" $",""" #otes receivable $",""" $",""" Annual collections.

Adjustments:


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(nearned interest income *"!,*1".!"*"!,*1".

!"

+nterest income *"!,*1".!"*"!,*1".!

" 'o recognize interest income thru

amortization as follows: 1"@ x *,"!*,1"! ? *"!,*1".!.

Cost of franchise1,*!!,*1.

"

9eferred cost of franchise1,*!!,*1.

" To recognize cost of franchise.

(nearned franchise revenue. !,!*&,1"!" %ranchise revenue !,!*&,1"!" To recognize franchise revenue based onthe

following analysis:

Conditions to be met: Cash #otes 3P4

6ervicesNN Les Les

eriod of refund O outlet alreadyopened. Les Les

Collectibility8easonably

assured

1F1F"x! Malance 1,!!","""

!,!*&,1"!

1F*1F"x!:Collection..... .

$","""Dess: +nterest collection

*"!,*1".!"

Collection Orincipal.$00,$&.$"

$00,$&.$"

3 $00,$&.$"4

,"0,$&.$"

,*&7,!1!.!"

6tatus 8evenue 8evenue

Adjustments (Installment salesmethod)a. 'o setup cost of franchise:

Cost of franchise revenue..1,*!!,*1.

" 9eferred cost of franchise

revenue

1,*!!,*1.

"

b. 'o setup deferred gross pro/t: (nearned franchise revenue *,!&*,1"!

Cost of franchise revenue1,*!!,*1.

"

9eferred gross pro/t,1*&,17.

&"There are di!erent options on this matter" an entry may be made to set#up cost of franchise and eventually it willbe closed to set#up deferred gross pro$t. Regardless of the option" the ob%ective is to set#up deferred gross pro$t.Refer to Illustration , for alternative treatment to set#up cost of franchise.


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Conditions to be met: Cash #otes 3P4 6ervicesNN Les Les eriod of refund O outlet already

opened. Les Les

Collectibility


1F1F"x! Malance 1,!!",""" *"!,1"!1F*1F"x!:

Collection..... . $","""Dess: +nterest collection *"!,*1".!"

Collection O rincipal.$00,$&.$" $00,$&.$

"3 $00,$&.$"

4,"0,$&.$"

,*&7,!1!.!

6tatus 8evenue O+F6 Gethod

Diability

c. 'o recognize realized gross pro/t onfranchise:

9eferred gross pro/t 1,!$$,&*."

8ealized gross pro/t on franchise1,!$$,&*.

" (ollections ) principal x gross pro$t rate

*+"-&,"'0&.'- x 7"704"/-7 ) /"477"&4/.+-127"704"/-7 3 */"7''"&04.+-

.


assuranceInome !tatement, "#$3"$#0%&:

%ranchise revenue 3accrual method4N

!,!71,1"!" "Dess: Cost of franchise 3accrualmethod4N

1,*!!,*1." "

Eross pro/t on regular franchise3accrual4N *,1*&,17.& "

5dd: Eross pro/t on franchise3installment

sales method4 "N1,!$$,&*.

"

Eross pro/t on franchise *,1*&,17.&1,!$$,&*.

"Dess: -perating expenses $",""" $","""

*,"7&,17.&1,!"$,&*.

"

5dd: +nterest income.. *"!,*1".!" *"!,*1".!

"

#et income.*,*&,!&*.

"1,771,*.

$"

*Note: This item represents regular franchise sales#type transaction. If the collectibility of

the fee note receivable1 is reasonably assured" the permissible method to be applied shouldbe the accrual method. It should be observed that in the event" there is cost of franchiseand the installment sales method is used" the concept of revenue recognition does literallyapply to franchise revenue but to the recognition of realized gross pro$t on franchise thrucollections as to principal multiplied by gross pro$t rate.

Alternatively" computation of interest and principal collections are as follows:

'ate ColletonInterest ("0

of Prnpal *npad


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*npad+alane)

+alane

1F"*F"x! !,!&*,1"!1F"*F"x! 1,!!",""" " 1,!!",""" *,"!*,1"!1F*1F"x! $",""" *"!,*1".!" $00,$&.$" ,*&7,!1!.!"'otal ,!"",""" *"!,*1".!" ,"0,$&.$"

Problem VIII1. 'he fee is earned for providing continuing services:

Cash or 5ccounts receivable 1"&,""" %ranchise revenue O continuing franchise fee 1"&,"""

. +f 1",""" of the fee is for national advertising:Cash or 5ccounts receivable 1"&,""" %ranchise revenue O continuing franchise fee $,""" (nearned franchise revenue O continuing franchise fee 1,"""

'he franchisor recognizes the unearned franchise fees as revenue when it performs theadvertising services and also records the costs as expenses, the entries should be:

5dvertising expenses xxx Cash, etc.. xxx

(nearned franchise revenue O continuing franchise fee 1,""" %ranchise revenue O continuing franchise fee 1,"""

Problem IGarch ":

Cash 0,"""#otes receivable ",""" (nearned franchise fee 0,"""

June 10:(nearned franchise revenue 0,""" %ranchise revenue 0,"""

July 10:Cash 0"" 6ervice revenue 0""

Problem Cash or 5ccounts receivable 117,$"" %ranchise revenue O supplies sales.. 117,$""

Cost of franchise O supplies sales ",""" 6upplies inventory. ","""

Problem ICash. 1,$""#otes receivable 31"&,""" O 1,$""4 &$,!"" (nearned interest income 3&$,!"" O $,7&4 1$,! %ranchise revenue 31,$"" = $,7& O !,&""N4 &$,77& (nearned franchise revenue O eAuipment saleN !,&""

5ll the criteria to recognize initial franchise fee as revenue was met, except that an amountof !,&"" eAuivalent to indicated pro/t 3!,""", selling price less 1,"" option price4 will


12/16

be deferred.

Bhen the franchisee subseAuently purchases the eAuipment, the entries are as follows:Cash or 5ccounts receivable 1,""

(nearned franchise revenue O eAuipment sale !,&"" %ranchise revenue O eAuipment sale.. !,"""

Cost of franchise eAuipment sale. 1,"" HAuipment inventory. 1,""

Problem II

5pril 1, "x!:Cash. &&,"""#otes receivable 1,""" %ranchise revenue 31,$"" = &$,!"" O !,&""N4 !&","""

9ecember *1, "x!:%ranchise revenue O initial franchise fee !&",""" +nterest income 31,""" x &@ x F14 11,0" Cash 310*,$"" O 11,0"4. 1!,"&" #otes receivable 1,""" Eain or revenue from repossessed franchise 1*!,!""

Problem IIICash 7,"""#otes receivable *$",""" 9eferred franchise purchase option liability. !*,"""

9eferred cost of franchise revenue &&,""" Cash, etc &&,"""

+nvestment.. 1","""9eferred franchise purchase option liability. !*,"""

9eferred cost of franchise revenue &&,""" Cash, etc $!,"""

-ultple Choe Problems1. a O following conditions should be observed to recognize revenue: 6ervices O none eriod of 8efund O expired Collectibility of the note O reasonably assured

'here was failure on one condition therefore, no revenue should be recognized.

. d O following conditions should be observed to recognize revenue: 6ervices erformed O yes

eriod of 8efund O not expired F still refundable Collectibility of the note O reasonably assured

'here was failure on one condition therefore, no revenue should be recognized.

*. a following conditions should be observed to recognize revenue: 6ervices erformed O none

eriod of 8efund O expiredCollectibility of the note O very uncertain or extremely uncertain.


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'here was failure on one condition therefore, no revenue should be recognized. 6ince,the collectibility of the note is extremely uncertain recognition of the note as an asset inunwarranted 3or should not be recorded4.

!. d O the problem already indicated that *"",""" is earned, therefore the remainingbalance of !"",""" 37"",""" O *"",""" is considered as unearned revenue.

0. aCash $,"""#otes receivable *",""" (nearned franchise fee *$,"""

$. b(nearned franchise fee *$,""" %ranchise fee revenue *$,"""

7. aCash $,"""#otes receivable *",""" %ranchise fee revenue *$,"""

&. b. b1". d11. d O the franchise fee revenue should be zero, since no substantial performance of

services had been performed 3and the down payment is still refundable4.

1. b +n this problem, since there is doubtful of collection, it is safely assumed to used

installment method. 'herefore, the realized gross pro/t would be:Collections in "x!.. "","""x: Eross pro/t rate ;1""@ 310","""F0"","""4>. 7"@8ealized gross pro/t in "x!. 1!","""

8evenue 5nalysis:Cash #F8

6ervices Les Leseriod of 8efund Les Les

Collectibility #o 8eas.5ssured

"",""" *"","""

6tatus 8ev O +F6 Gethod Diability

1*. d+n this problem, full accrual method is used to recognized the initial franchise fee of

Intal .ranhse .ee:

Cash /otes ee1able!er1es Les Les

Perod of efund Les LesColletblt2 Reasonably Assured

*+-"--- *0-"---!tatus Revenue Revenue

6ubstantial performance of services has been rendered because commencement ofoperations by the franchisee shall be presumed to be the earliest point of which


14/16

substantial performance has occurred, unless it can be demonstrated that substantialperformance of all obligations, including services rendered voluntarily, has occurredbefore that time.

eriod of refunding the initial franchise fee and collectibility of the notes is notanymore a problem 3they depend on the pro/tability of its /rst year of operations4

because the result of operations in the /rst year is pro/table. 'herefore, the initialfranchise fee of 1"",""" 3",""" = &","""4 is considered as revenue, and acontinuing franchise fee of 0,""" 31@ x 0"","""4 should be also be recognized asrevenue continuing fanchise.

'herefore, the earned franchise fee amounted to 1"0,""" 31"",""" initial plus0,""" continuing4.

1!. a +nitial franchisee revenue 3since all services had been performed

and assumed that period of refunding already expired4.. 1"",""" 5dd: Continuing franchise revenue 30@ x &"","""4!",""" 'otal 8evenue from franchise. 1!","""

10. d 'here is already substantial performance of services rendered since, the franchise

outlet started operations and it is assumed that period of refund has expired.

'he continuing franchise fee is recognized also as revenue since it is earned at the timeit was received.

'he net income would be:%ranchise 8evenue:

+nitial %ranchise %ee:9own payment *","""P of installment 31",""" x 1.7*004. 17,*00

!7,*00 Continuing %ranchise %ee 30@ x 0"","""4 0,""" 'otal %ranchise 8evenue 7,*00 5dd: +nterest +ncome 31"@ x 17,*0041,7*0 'otal 8evenueF#et +ncome 7!,""

1$. a 5ll conditions that initial franchise fee be recognized as revenue had been met asfollows: Revenue Analysis for IFF

Cash #F8

6ervices Les Les

eriod of 8efund3note4

Les Les

Collectibility 8eas. 5ssured

"",""" *"","""!tatus e1enue e1enue

'he #et +ncome then would be as follows: %ranchise 8evenue.. 0"",""" Dess: Cost of %ranchise 10",""" #et +ncome *0","""


15/16

17. d+n this problem, full accrual method is used to recognized the initial franchise fee ofP100,000analyze as follows:

Revenue Analysis for IFF

Cash #F8

6ervices Les Leseriod of 8efund3note4

Les Les

Collectibility 8eas. 5ssured

",""" &","""!tatus e1enue e1enue

/ote:eriod of refunding the initial franchise fee was presumed to have been expiredsince the business operates pro/tably in its /rst year of operation.

Continuing Franchise FeeConsidered revenue the moment continuing serviceshad been rendered amounted to 0,""" 31@ x 0"","""4.

+nitial %ranchise %ee 1"",""" Continuing franchise fee. 0,""" 'otal 1"0,""" Dess: +ndirect cost of franchise 10,""" #et income ","""

1&. d 8evenue ? !"",""" +nterest income ? 1$",""" Q&@ QF1 ? ,$"" Cash ? 1&,""" O ,$"" ? 11&,!"" 8epossession revenue: !",""" O 1&,""" ? 11,""".

1. cCash ? 0$",""" = !&,""" ? $"&,"""

%ranchise %ee 8evenue ? 0$","""

(nearned %ranchise %ees ? !&,""" Q"@ ? ,$""

8evenue from Continuing %ranchise %ees ? !&,""" O ,$"" ? *&,!"".

". b "",""" = 0!0,&7 O !,""" ? 71,&7.

1. b%ranchisee freAuently purchases all of the eAuipment, products, and supplies from thefranchisor. 'he franchisor would account for these sales as if, it would be a product sales.6ometimes, however, the franchise agreement grants the franchisee the right to maRe bargainpurchases of eAuipment or supplies after the initial franchise fee is paid. +f the bargain priceis lower that the normal selling price of the same product or it does not provide the franchisorthe reasonable pro/t, then, a portion of the initial franchise fee should be deferred. 'hedeferred portion would be accounted for as ad)ustment of the selling price when the franchiseesubseAuently purchases the eAuipment or supplies. 'herefore, the amount of revenue wouldbe ",*! computed as follows:

Cash /otes ee1able6ervices Les Leseriod of 8efund Les LesCollectibility 8easonably 5ssured

0,""" $&,*!6tatus 8evenue 8evenue except

*,""" reasonablepro/t on sale of


16/16

eAuipment 'he revenue from franchise would be:

Cash 0,"""P of #ote..$&,*!Dess: 8easonable pro/t on sale of

HAuipment 10,""" O 1,"""4. *,""" $0,*! ",*!

Incidentally, the entries !ould "e (pon receipt of +%%:

Cash 0,"""#otes 8eceivable ",""" (nearned +nterest +ncome 3",""" O $&,*!4. 1,7$$

%ranchise 8evenue. ",*!(nearned %ranchise 8evenue. *,"""

+f eAuipment was sold:

Cash or 5ccounts 8eceivable 1,"""(nearned %ranchise 8evenue *,"""

%ranchise 8evenue O HAuipment 10,"""

Cost of 6ales O eAuipment 1,"""HAuipment +nventory.. 1,"""

. b

Cash /otes ee1able

6ervices #o #oeriod of 8efund #o #o

Collectibility Reasonably Assured*+,"--- *V # *4&"'+4

;V ) *,-"---6II29isct. */-"455

6tatus #ia"ility #ia"ility

heores

1

.

'rue $. 'rue 11. a

.

%alse 7. 'rue 1. b

*.

%alse &. 'rue 1*. a

!.

%alse . b 1!. d

0.

'rue 1",

d 10,

solution manual chapter 9

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