Reference no: EM132597516

On January 1, 2020, an entity granted a franchise agreement to a franchisee. The contract provides that the franchisee shall pay an initial franchise fee of P500,000 and on-going payment of royalties equivalent to 8% of the sales of the franchisee.

• On January 1, 2020, the franchisee paid downpayment of P200,000 and issued a 3-year non-interest bearing note for the balance payable in three equal annual installments starting December 31, 2020. The note has present value of P240,183 with effective interest rate of 12%.
• on June 30, 2020 the entity completed the performance obligation of the franchise at a cost of 352, 146. Aside from that, the entity incurred indirect cost of 22,009 the franchise started operation on July 1, 2020 and reported sales revenue amounting to 50,000 for the year ended December 31, 2020. The franchises paid the first installment on its due date.

Question 1: If the collection of the note receivable is reasonably assured, what is the gross profit to be recognized by the entity for the year ended December 31, 2020 in relation to the initial franchise fee?