Reference no: EM133088034

Question - LISAYAH Company operates and franchises coffee shops around the world. On January 1, 2021, it entered into a franchise agreement with a franchisee. As part of its franchise agreement, it requires a franchisee to pay an initial franchise fee in the amount of P1,000,000, of which P500,000 is payable at the date of perfection of contract and the balance payable in five annual installments every December 31.The franchisee issued a non-interest-bearing note with effective interest rate of 10% for the balance of the initial franchise fee and the present value of the note isP758,157.

The franchise agreement also provides for ongoing payment of royalties of 5% based on sales revenue of franchisee. As part of the franchise agreement, the company provides pre-opening services, including supply and installation of coffee equipment and cash registers with a total cost of P754,894. The company evaluates and determines that the contract with the customer is a single performance obligation that need not be separated. As of July 1, 2021, it already satisfied its performance obligation to supply and install coffee equipment and cash registers to the franchisee.

For the year ended December 31, 2021, the franchisee reported sales revenue in the amount of P1,000,000.

Required -

1. What is the net income to be reported by the company for the year ended December 31, 2021, if the collection of the note receivable is reasonably assured?

2. What is the net income to be reported by the company for the year ended December 31,2021, if the collection of the note receivable is not reasonably assured?