Reference no: EM133024874
Question - Diamond's Pizza Inc. enters into a franchise agreement on December 31, 2019, giving Domino Corp. the right to operate as a franchisee of Diamond's Pizza for 5 years. Diamond charges Domino an initial franchisee fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is payable when Domino Corp. signs the agreement, and the balance is payable in five annual payments of P57,000 each on December 31.
Consider the following for allocation of the transaction price at December 2019:
Rights to the trade name, market area, technical and propriety know-how P190,000.00 Services - training, etc 94,591.50
Machinery and equipment etc. (costing, P95, 000) 133,000.00
Total Transaction price P417,591.50
The credit rating of Domino indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P57,000 each discounted at 8% is P227, 591.50. The discount of P57,408.50 represents the interest revenue to be accrued by Diamond's Pizza Inc. over the payment period.
Training is completed in January 2020, the equipment is installed in January 2020 and Domino holds a grand opening on February 4, 2020. On February 4, 2020 the franchise opens. Domino also promises to pay on going royalty payments of 1% of its annual sales (payable every January 31 of the following year) and is obliged to purchase products from Diamond's at its current stand alone selling prices at the time of purchase.
1. How many performance obligations exist in this contract for franchise?
A. 2 C. 4
B. 3 D. 5
2. When should Diamond recognize revenue for the rights (combined) to the trade name, market area and propriety know-how which give rise to a single performance obligation?
A. No transaction C. Point in time
B. No revenue D. Over time
3. How much revenue (franchise revenue, service revenue and sales revenue - machinery and equipment) would be recognized on December 31, 2019?
A. Zero C. P 133, 000.00
B. P 94, 591.50 D. P190, 000.00
4. How much revenue (franchise revenue, service revenue and sales revenue - machinery and equipment) should be recognized on February 4, 2020?
A. P 94, 591.50 C. P 190, 000.00
B. P 133, 000.00 D. P417, 591.50
5. How much continuing franchise revenue be recognized on December 31, 2020 assuming the sales of P 4,987,500 was generated for the first year of operations?
A. Zero C. P 190, 000.00
B. P 49, 875.00 D. P417,591.50