Reference no: EM132714385
Question - COMPREHENSIVE PROBLEMS
Problem 1 - 3-IN-1 COFFEE COMPANY charges an initial franchise fee of P 900,000 to Mrs. Fely Nimfa for the right to operate as a franchisee of 3-IN-1 COFFEE COMPANY. Of this amount P 180,000 is payable when the agreement is signed and the balance is payable in 4 equal installment payments. In return for the payment of initial franchise fee, the franchisor will assist the franchisee to locate the site, supervise the construction activity and provide bookkeeping services. The credit rating of the franchisee indicates that the money can be borrowed at 10%. The present value of an ordinary annuity factor is 3.16987.
Questions:
1. How much is the franchise revenue if the down payment is refundable, the collectability of the note is reasonably assured but the substantial services remain to be performed?
2. How much is the franchise revenue if the down payment is non-refundable, the collectability of the note is reasonably assured and there is substantial performance of services?
3. How much is the franchise revenue if the down payment is non-refundable, the collectability of the note is not reasonably assured and there is substantial performance of services?
4. How much is the franchise revenue if the down payment is non-refundable, the collectability of the note is not reasonably assured and there is substantial performance of services equivalent to the down payment?
Problem 2 - 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.
Questions:
1. What is the net income earned during the year 2016, assuming the collectability of the note is reasonably assured?
2. What is the net income earned during the year 2016, assuming the collectability of the note is not reasonably assured?