Chapter 9: Problems

The following information relates to questions 6 to 10.

Shangri-La Restaurant sells a franchise that require an initial franchise fee of P700, 000. A down
payment of P200, 000 cash is required, with the balance covered by the issuance of P500, 000,
10% note payable by the franchisee in five equal annual installments.

The franchisor accounts for this initial franchise fee depending on the surrounding
circumstances related to the franchise agreement.

1. The franchisor has not substantially performed all material services, the refund period
has expired and the collectability of the note is reasonably assured. The franchise
revenue amounted to:
a. P 0
b. P200, 000
c. P500, 000
d. P700, 000

Following conditions should be observed to recognize revenue:

 Services – none
 Period of Refund – expired
 Collectibility of the note – reasonably assured

There was failure on one condition; therefore, no revenue should be recognized.

2. The franchisor has substantially performed all material services, refund period has not
expired and collectability of the note is reasonably assured. The unearned franchise
revenue amounted to:
a. P 0
b. P200, 000
c. P500, 000
d. P700, 000

Following conditions should be observed to recognize revenue:

Services Performed – yes
Period of Refund – not expired / still refundable
Collectibility of the note – reasonably assured

There was failure on one condition; therefore, no revenue should be recognized.

 3. The franchisor has not substantially performed all material services, the refund period
has expired and there is no reasonable basis for estimating the collectability of the note
or the collection of the note is very uncertain or extremely uncertain, the entry required
is:
a. Cash 200, 000
Unearned franchise revenue 200, 000
b. Cash 200, 000
Notes Receivable 500, 000
Unearned Franchise Revenue 700, 000
c. Cash 200, 000
Notes Receivable 500, 000
Franchise revenue 200, 000
Unearned Franchise Revenue 700, 000
d. Cash 200, 000
Notes Receivable 500, 000
Franchise revenue 700, 000

Following conditions should be observed to recognize revenue:

Services Performed – none
Period of Refund – expired
Collectibility of the note – very uncertain or extremely uncertain.

There was failure on one condition; therefore, no revenue should be recognized. Since, the
collectibility of the note is extremely uncertain recognition of the note as an asset in
unwarranted (or should not be recorded).

4. The franchisor earned only P300, 000 from providing initial services with the balance
being a down payment for continuing services, the refund period has expired and the
collectability of the note is reasonably assured, the entry would be:
a. Cash 200, 000
Unearned franchise revenue 200, 000
b. Cash 200, 000
Notes Receivable 500, 000
Unearned Franchise Revenue 700, 000
c. Cash 200, 000
Notes Receivable 500, 000
Franchise revenue 300, 000
Unearned Franchise Revenue 400, 000
d. Cash 200, 000
Notes Receivable 500, 000
 Franchise revenue 700, 000

5. Pista Hut granted a franchise to Eat-N-Run for the Rainbowbelt area. Eat-N-Run was to
pay a franchise fee of P100, 000 payable in five equal installments starting with the
payment upon signing of the agreement. The franchisee was to pay monthly 1% of gross
sales of the preceding month. Should the operation of the outlet prove to be
unprofitable, the franchisee may be cancelled with whatever obligation owing to Pista
Hut, in connection with the P100, 000 franchise fee, waived. The first year’s operation
generated a gross sales of P500, 000, which is considered to be a profitable operations.
Indirect cost of franchise amounted to P15, 000. For the first year, Pista Hut’s net
income (loss) amounted to:
a. (P10, 000)
b. P 5, 0000
c. P 10, 000
d. P 90, 000

In this problem, full accrual method is used to recognized the initial franchise fee of P100,000
analyze as follows:
Revenue Analysis for IFF
Cash N/R
Services Yes Yes
Period of Refund Yes Yes
(note)
Collectibility Reas. Assured
20,000 80,000
Status Revenue Revenue
Note: Period of refunding the initial franchise fee was presumed to have been expired
since the business operates profitably in its first year of operation.

Continuing Franchise Fee: Considered revenue the moment continuing services had been
rendered amounted to P5,000 (1% x P500,000).

Initial Franchise Fee…………………………………………………………P 100,000

Continuing franchise fee…………………………………………………. 5,000
Total…………………………………………………………………………… P 105,000
Less: Indirect cost of franchise…………………………………………… 15,000
Net income……………………………………………………………………P 90,000
CHAPTER 10:

Theories

1. In consignment sales, the consignee:

a. Records the merchandise as an asset on its books
b. Records a liability for the merchandise held on consignment.
c. Recognizes revenue when it ships merchandise to the consignor
d. Prepares an “account report” for the consignor which shows sales, expenses,
and cash receipts

2. Revenue is recognized by the consignor when the:

a. Goods are shipped to the consignee
b. Consignee receives the goods
c. Consignor receives an advance from the consignee
d. Consignor receives an account sales from the consignee

3. Goods on consignment should be included in the inventory of:

a. The consignor but not the consignee
b. Both the consignor and the consignee
c. The consignee but not the consignor
d. Neither the consignor nor the consignee

4. In accounting for sales on consignment, sales revenue and the related cost of goods sold
should be recognized by the:
a. Consignor when the goods are shipped to the consignee
b. Consignee when the goods are shipped to the third party
c. Consignor when notification is received the consignee has hold the goods
d. Consignee when cash is received from the customer

PROBLEMS

Use the following information for questions 6 to 8:

On June 1, DD Company shipped twenty five DVD to BB View Store on consignment. The DVD is
to be sold at an advertised price of P200 per item. The cost of each DVD to the consignor is
P100. The consignor paid P75 to ship the merchandise. Commission is to be 25% of sales price.
During the month, two DVD were returned.

On June 30, BB View Store remitted the amount due to consignor after deducting commission
of P400.
5. The amount remitted by BB View Store is:
a. P 1, 100
b. P 1, 600
c. P 1, 200
d. P 2, 000

Commission = 25% x Sales price

P400 = 25% x Sales price
Sales price = P400 ÷ 25% = P1,600

Number of units sold = Selling price = __P1,600__ = 8 tapes

Price per tape P200 per tape

Sales ……………………………………………………………….. P1,600

Less Commission of consignee………………………………... 400
Amount remitted by Beta View Store………………………...P1,200

6. The consignment profit is:

a. P 370
b. P 415
c. P 720
d. P 800

Charges Related to
Total Consignment Inventory on
Charges Sales Consignment
(25) (8) (15)
Consignor’s charges:
Cost P2,500 P800 P1,500
Freight-out 75 30 45
Consignee’s charge - Commission __400__ __400__ _______
Total P2,975 1,230 _P1,545_
Sales price _1,600_
Consignment profit _P370_

7. The cost of inventory on consignment amounted to:

a. P 1, 400
b. P 1, 550
c. P 1, 545
 d. P 1, 500

Refer to No. 7 for computation.

Use the following information for questions 9 and 10:

On October 1, 20x4, the NN Company consigned one hundred wall clocks to P&G Retailers, Inc.
Each wall clock had a cost of P 150. Freight on the shipment was paid by NN Company for P 200.
On December 1, 20x4, P&G submitted an account sales stating that it had sold sixty pieces and
it was remitting the P12, 840 balance due. The remittance was net of the following deductions
from the sales price of the wall clocks sold:

Commission (20% of sales price) ?

Advertising P 500
Delivery and installation charges P 100

8. What was the total sales price of the wall clocks sold by P&G Retailers, Inc.?
a. P 13, 440
b. P 15, 000
c. P 16, 800
d. P 17, 000

Sales (unknown) x
Less Charges:
Advertising P500
Delivery and installation charges 100
Commission (unknown) 20%x _______
Remittance P 12,840

x – (P500 + P100 + 20%x) = P 12,840

x – 20%x = P12,840 + P600
80%x = P13,440
x = P16,800

9. What was the cost of inventory on consignment?

a. P 6, 000
b. P 6, 080
c. P 6, 280
d. P 6, 320

Cost (P150 per unit x 40 units) P6,000

 Freight on shipment (P200 x 40/100) 80
Cost of inventory on consignment P6,080