Reference no: EM132603293

Question - On January 1, 2016, MARK entered into a franchise agreement with MARIAN, Inc. to sell M&M's products. The agreement provides of an initial franchise fee of P 30,000,000, payable as follows: P 18,000,000 cash to be paid upon signing of the contract, and the balance in five equal annual payments every December 31 starting 2016. MARK signs 12% interest bearing note for the balance. The agreement further provides that the franchisor will assist the franchisee in locating the business site, designing and supervising the construction of the building, and training of management and employees. The agreement also provides that the franchisee must pay a continuing franchise fees equal to 10% of its monthly gross sales.

On June 30, 2016, the franchisor completed the initial services required by the contract at a cost of P 8,000,000, of which 25% was indirect. The franchisee commenced business operations on July 5, 2014. The gross sales reported by the franchisee to the franchisor are: July sales P 150,000; August sales P 180,000; September sales P 270,000; October sales P 200,000; November sales P 580,000; and December sales P 720,000.

REQUIRED -

1. Compute for the net income earned during the year 2016, assuming the collectability of the note is reasonably assured.

2. Compute for the net income earned during the year 2016, assuming the collectability of the note is not reasonably assured.