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    Solution:: Total Revenue From Franchise Fees 95,000

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    Rich Services Inc. recorded $95,000 in revenue from franchise fees in 2021, which included an initial $70,000 fee and 5% of Yummy Company's $500,000 in gross sales. Ray Company earned $80,000 in franchise fees from Ruth in the first year, which included a $20,000 initial fee payment and 1% of $500,000 in gross sales. Figaro Inc. realized $1,316,861 in gross profit for 2021 from its franchise agreement with JJ Company, which included payments of $1,250,000 upfront and $631,230 in principal on notes receivable, less $802,500 in services costs.

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    Solution:: Total Revenue From Franchise Fees 95,000

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    Rich Services Inc. recorded $95,000 in revenue from franchise fees in 2021, which included an initial $70,000 fee and 5% of Yummy Company's $500,000 in gross sales. Ray Company earned $80,000 in franchise fees from Ruth in the first year, which included a $20,000 initial fee payment and 1% of $500,000 in gross sales. Figaro Inc. realized $1,316,861 in gross profit for 2021 from its franchise agreement with JJ Company, which included payments of $1,250,000 upfront and $631,230 in principal on notes receivable, less $802,500 in services costs.

    Original Title

    Seatwork in Franchise

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    Rich Services Inc. recorded $95,000 in revenue from franchise fees in 2021, which included an initial $70,000 fee and 5% of Yummy Company's $500,000 in gross sales. Ray Company earned $80,000 in franchise fees from Ruth in the first year, which included a $20,000 initial fee payment and 1% of $500,000 in gross sales. Figaro Inc. realized $1,316,861 in gross profit for 2021 from its franchise agreement with JJ Company, which included payments of $1,250,000 upfront and $631,230 in principal on notes receivable, less $802,500 in services costs.

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    242 views3 pages

    Solution:: Total Revenue From Franchise Fees 95,000

    Uploaded by

    Shr Bn
    Rich Services Inc. recorded $95,000 in revenue from franchise fees in 2021, which included an initial $70,000 fee and 5% of Yummy Company's $500,000 in gross sales. Ray Company earned $80,000 in franchise fees from Ruth in the first year, which included a $20,000 initial fee payment and 1% of $500,000 in gross sales. Figaro Inc. realized $1,316,861 in gross profit for 2021 from its franchise agreement with JJ Company, which included payments of $1,250,000 upfront and $631,230 in principal on notes receivable, less $802,500 in services costs.

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    of 3

    College of Business and Accountancy

    Seatwork-Assignment in ACCSTRA

    1. On January 2, 2021, Rich Services Inc. signed an agreement authorizing


    Yummy Company to operate as a franchisee over a 20 year period for an
    initial franchise fee of P 70,000 received when the agreement was signed.
    Yummy commenced operations on July 1, 2021, at which date all of the initial
    services required of Rich had been performed. The agreement also provides
    that Yummy must pay annually to Rich a continuing franchise fee equal to 5%
    of their gross sales. Yummy reported gross sales of P 500,000 for 2021.

    For the year ended December 31, 2021, how much should Rich Services, Inc.
    record as revenue from franchise fees with respect to the yummy franchise?
    a. P 95,000 c. P 45,000
    b. 70,000 d. 25,000

    Solution:

    Initial franchise fee 70,000


    Continuing franchise fee (500,000 x 5%) 25,000
    Total revenue from franchise fees 95,000

    2. Ray Company granted a franchise to Ms. Ruth. Ruth was to pay P 100,000
    initial franchise fee payable in five equal annual installments starting with the
    payment upon signing of the agreement. The franchisee was to pay monthly
    1% of gross sales of the preceding month. Should the operation of the outlet
    prove to be unprofitable, the franchise may be cancelled with whatever
    obligation owing Ray, in connection with the P 100,000 franchise fee, waived.

    The first year of operations generated a gross sales of P 500,000. For the first
    year, Ray Company earned franchise fee of:
    a. 100,000 c. P 160,000
    b. 80,000 d. 25,000

    Solution:

    Initial franchise fee (100,000/ 5 years) 20,000


    Continuing franchise fee (500,000 x 12%) 60,000
    Total earned from franchise fees 80,000

    3. On January 2, 2021, JJ Company signed an agreement to operate as a


    franchisee of Figaro, inc. for an initial franchise fee for P 3,125,000 for 10
    years. Of this amount, 40% was paid when the agreement was signed and
    the balance payable in four semi-annual payments beginning June 30, 2021;
    JJ Company signed a non-interest bearing note for the balance. JJ’s credit
    rating indicates that it can borrow money at 24% on the loan of this type.
    Substantial services costing P 802,500 has been rendered by Figaro Inc. the
    present value of an annuity of P 1 at 12% for 4 periods is 3.04

    If the collection of the note is not reasonable assured, the realized gross profit
    for the year ended December 31, 2021 is:
    a. P 1,338,307 c. P 1,321,345.50
    b. 1,316,861 d. 1,069,031.50

    Solution:

    First payment (3,125,000 x 40%) 1,250,000


    PV of notes receivable
    ((1,875,000/ 4 years) x (468,750 x 3.04) 1,425,000
    Total 2,675,000
    Direct cost of services 802,500
    Gross profit 1,872,500

    Gross profit rate (1,872,000/2,675,000) 70%

    Date Collection Interest Principal Balance of NR


    Jan. 1 1,425,000
    Jun. 30 468,750 171,000 297,750 1,127,250
    Dec. 30 468,750 135,270 333,480 793,770
    Total principal 631,230
    First payment 1,250,000
    Total collection 1,881,230
    Gross profit rate 70%
    Realized gross profit, end 1,316,861

    For Nos. 4 and 5


    Ms. Jasmin Sy purchased franchise from Goldilock, Inc. the franchise agreement
    provides an initial franchise fee of P 4,500,000, payable as follows: P 1,500,000 at
    the date of signing, P 2,000,000 three months after signing, and the balance one
    year after signing. The expected date of signing is January 2, 2021. A continuing fee
    of 2% of the gross sales is also to be paid to the franchisor. Total sales for the year
    reported by the franchisee amounts to P 2,000,000.

    Costs associated with the initial franchise fee are as follows:


    a. Title to kitchen equipment, with a cot of P 1,500,000, is to be transferred to
    the transferred to the franchisee on the day the agreement is signed. The fair
    market value of the equipment is P 1,800,000
    b. An additional P 500,000 for initial services are incurred on January 18, 2021.

    There are no associated continuing costs.

    4. What is the entry of Goldilock to record the initial franchise fee on January 2,
    2021?
    a. Cash P 1,500,000
    Note receivable 3,000,000
    Deferred revenue from IFF 4,500,000

    b. Cash 1,500,000
    Note receivable 3,000,000
    Revenue from IFF 4,500,000

    c. Cash 1,500,000
    Note receivable 3,000,000
    Deferred revenue from IFF 2,700,000
    Revenue from IFF 1,800,000

    d. Cash 1,500,000
    Note receivable 3,000,000
    Revenue from IFF 1,800,000
    Unearned interest revenue 2,700,000

    5. How much is the net income to be recognized by Goldilocks on December


    31, 2021?
    a. P 740,000 c. P 2,540,000
    b. 4,040,000 d. 2,500,000

    Solution:

    Initial franchise fee 4,500,000


    Less: Initial services (500,000)
    Gross profit 4,000,000
    Continuing franchise fee (2,000,000 x 2%) 40,000
    Net income recognized 4,040,000

    6. Kopi Cafe sold a coffee shop franchise to Mr. J. the sale agreement signed in
    March 2020 called for a P 350,000 down payment plus two P 175,000 annual
    payment representing the value of initial franchise services rendered by Kopi
    Cafe.

    In addition, the agreement required the franchisee to pay 8% of its gross


    sales to the franchisor.
    The coffee shop opened in October 2020 and its sales for the quarter ended
    amounted to P 2,625,000.

    The PV of annuity of 1 at 12% for two periods is 1.6901.


    Assuming a 12% interest rate is appropriate, what will the Kopi Cafe’s total
    revenue for 2020?
    a. P 295,767.50
    b. P 891,261
    c. P 855,767.50
    d. P 933,261.

    Solution:

    Annual payment (175,000 x 1.6901) 295,767.50


    Gross profit interest (2,626,000 x 8%) 210,000.00
    First payment 350,000.00
    Total revenue for 2020 855,767.50

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