Franchise Answer Key
Correction
Problem 32 Req. 3 Choice B: it should be 722,500
1. D/D
Req. 1
Initial Franchise Fee (184,505 / 5 years) 36,901
Royalty fee (8% x 750,000) 60,000
Interest Revenue (84,505 x 12%) 10,141
Total 107,042
Req. 2
Cash 100,000
Notes Receivable 100,000
Unearned Franchise Revenue 184,505
Unearned Interest Income 15,495
2. B/C/D
Req. 1
Initial Fee - at point in time 500,000
Interest Income (400,000 x 10% x 3/12) 10,000
Total Revenue 510,000
Req. 2
March 31, 20x1
Cash 100,000
Notes Receivable 400,000
Deferred Franchise Revenue 500,000
April 10, 20x1
Deferred Franchise Revenue 500,000
Franchise Revenue 500,000
Req. 3
Initial Franchise fee (500,000/5 years x 3/12) 25,000
Interest Income (400,000 x 10% x 3/12) 10,000
Total Revenue 35,000
3. A/A
Req. 1 and 2
Answer
Stand Alone Transaction
Selling Price Price
Stall 315,000 35% 259,000
Raw Materials 360,000 40% 296,000
Tradename 225,000 25% 185,000
Total 900,000 740,000
Stall 259,000
Raw materials (600/1000 x 296,000) 177,600
Tradename (at point in time) 185,000
Royalty (5% x P100,000) 5,000
Total Franchise Revenue 626,600
4. D/C/B/C/B/B
Req. 1
Tradename (950,000/5 years) 190,000
Royalty (10% x 1M) 100,000
Total Franchise revenue 290,000
Req. 3
Stand Alone Transaction
Selling Price Price
Installation 300,000 30% 285,000
Tradename 700,000 70% 665,000
1,000,000 950,000
Installation 285,000
Tradename (665,000/5 years) 133,000
Royalty (10% x 1M) 100,000
Total Franchise revenue 518,000
Req. 4
Installation 285,000
Tradename 665,000
Royalty (10% x 1M) 100,000
Total Franchise revenue 1,050,000
5. A/C
Req. 1
The entity shall not recognized any franchise revenue because the collection is not reasonably assured.
Req. 2
The entity shall only recognized revenue from interest. The revenue from initial franchise fee is not
recognized because the collection is not reasonably assured.
Interest Income (542,500 x 18%) 97,650
Direct Cost (defer the direct cost) (0)
Indirect Cost (12,500)
Total Net Income 85,150
For no.6 and 7
6. C
7. D
PV of note 3,032,625
Down payment 1,000,000
Adjusted Franchise Fee 4,032,625 Divide by 5 yrs 806,525
Interest Income (3,032,625 x 10%) 303,263 303,263
Continuing fee (8% x 3M) 240,000 240,000
Direct Cost (2,822,838) Divide by 5 yrs (564,568)
Indirect Cost (151,632) (151,632)
Total Net Income - at point in time 1,601,418 Net Income - OT 633,588
8. A
Initial fee 1,200,000
Interest Income:
1,000,000 x 6/12 x 12% 60,000
750,000 x 1/12 x 12% 7,500
Direct cost (900,000)
Total net income 367,500
9. B
Initial fee (1,200,000 / 5 x 7/12) 140,000
Interest Income:
1,000,000 x 6/12 x 12% 60,000
750,000 x 1/12 x 12% 7,500
Direct cost (900,000/5 years x 7/12) (105,000)
Total net income 102,500
10. C
Initial Franchise fee 3,000,000
Down payment (1,000,000)
Notes Receivable 2,000,000
Divide by no of collection 4
Installment collection 500,000
x PV factor 3.1698
PV of note 1,584,900
Down payment 1,000,000
Adjusted Franchise Fee 2,584,900
Continuing fee (1,240,000 x 5%) 62,000
Interest Income (1,584,900 x 10% x 6/12) 79,245
Direct Cost (930,564)
Indirect Cost (167,400)
Total 1,628,181
11. C
Initial Franchise fee 3,000,000
Down payment (1,000,000)
Notes Receivable 2,000,000
Divide by no of collection 4
Installment collection 500,000
x PV factor 3.1698
PV of note 1,584,900
Down payment 1,000,000
Adjusted Franchise Fee 2,584,900 divide by 5 x 5/12 215,408
Continuing fee (1,240,000 x 5%) 62,000 62,000
Interest Income (1,584,900 x 10% x 6/12) 79,245 79,245
Direct Cost (930,564) divide by 5 x 5/12 (77,547)
Indirect Cost (167,400) (167,400)
Total 1,628,181 111,706
12. C
13. C
14. B
15. D
16. C
17. D
18. D
19. D
20. B
21. C
22. D
23. A
24. D
25. D
26. A
27. C
28. D
29. C
30. D/B
Req. 1
Answer
250,000 / 5 years = 50,000
Req. 2: The entire upfront fee will be recognized as revenue when the license is granted.
31. D/B/A/D/D
DP of cash 500,000
PV of Note (750,000 x 1.78326) 1,337,445
Total Transaction price 1,837,445
Transaction
Stand Alone Selling Price Price
Training 400,000 400/2000 367,489.00
Equipment 1,000,000 1000/2000 918,722.50
Software 600,000 600/2000 551,233.50
Total 2,000,000 1,837,445.00
Cash 500,000
Notes Receivable 1,500,000
Unearned Interest Income (1.5M - 1,337,445) 162,555
Unearned License Revenue - Software 551,233.50
Unearned Service revenue - Training 367,489.00
Unearned Sale revenue - Equipment 918,722.50
Answer
Unearned Franchise Revenue - Tradename 551,234
Unearned Service revenue - Training 367,489
Unearned Sale revenue - Equipment 918,723
Franchise Revenue - Tradename 551,234
Service revenue - Training 367,489
Sales Revenue - Equipment 918,723
Answer
Unearned License Revenue - Software 551,233.50
Unearned Service revenue - Training 367,489
Unearned Sale revenue - Equipment 918,722.50
Total Revenue from Franchise 1,837,445
Answer
Unearned Service revenue - Training 367,489
Unearned Sale revenue - Equipment 918,723
Servic e revenue - Training 367,489
Sales Revenue - Equipment 918,723
Unearned License Revenue - Softwar (551,233.50/ 5 yrs x 3/12) 27,561.68
Unearned Service revenue - Training 367,489
Unearned Sale revenue - Equipment 918,722.50
Total Revenue from Franchise 1,313,773.18
32. C/D/B
Answer
Cash 150,000
Notes receivable 600,000
Unearned License Revenue - Software 90,000
Unearned Sales Revenue - Equipment 380,000
Unearned Service Revenue - Training 280,000
Software 90,000
Equipment 380,000
Training 280,000
Total 750,000
Correction
Software (90,000 / 5 yrs x 5/12) 7,500
Equipment 380,000
Training 280,000
Interest Income (600,000 x 10% x 11/12) 55,000
Total 722,500
33. -
Straight Problems
Problem 1
A. Over Time
Stand Alone Transaction
Selling Price Price
Installation 270,000 30% 240,000
Tradename 630,000 70% 560,000
900,000 800,000
Jan. 1
Cash 800,000
Unearned Franchise Revenue - Tradename 560,000
Unearned Franchise Revenue - Installation 240,000
Jan. 10
No entry
Jan. 12
No Entry
Dec.31
Cash or Receivable (200K x 5%) 10,000
Franchise Revenue (Continuing fee) 10,000
Unearned Franchise Revenue - Tradename 112,000
Unearned Franchise Revenue - Installation 48,000
Franchise Revenue - Tradename (112K /5 yrs.) 112,000
Franchise Revenue - Installation (48K/5 yrs.) 48,000
B. At Point in Time
Jan. 1
Cash 800,000
Unearned Franchise Revenue - Tradename 560,000
Unearned Franchise Revenue - Installation 240,000
Jan. 10
Unearned Franchise Revenue - Installation 240,000
Franchise Revenue - Installation 240,000
Jan. 12
Unearned Franchise Revenue - Tradename 112,000
Franchise Revenue - Tradename 112,000
Dec.31
Cash or Receivable (200K x 5%) 10,000
Franchise Revenue (Continuing fee) 10,000
Problem 2
A. OVER TIME
Initial Franchise fee 1,520,000
Down payment (720,000)
Notes Receivable 800,000
Divide by no of collection 4
Installment collection 200,000
x PV factor 3.2397
PV of note 647,940
Down payment 720,000
Adjusted Franchise Fee 1,367,940
Jan. 1
Cash 720,000
Notes Receivable 800,000
Deferred Franchise Revenue 1,367,940
Unearned Interest Income 152,060
Deferred Franchise Cost (direct) 820,764
Expense (indirect) 66,397
Cash 887,161
Dec. 31
Cash 200,000
Notes Receivable 200,000
Unearned Interest Income 58,315
Interest Income (647,940 x 9%) 58,315
Cash or Receivable (5% x 567,000) 28,350
Franchise Revenue (Continuing fee) 28,350
Deferred Franchise Revenue (1,367,940/5) 273,588
Franchise Revenue 273,588
Franchise Cost (expense) 164,153
Deferred Franchise Cost (820,764/5) 164,153
B. At Point in Time
Jan. 1
Cash 720,000
Notes Receivable 800,000
Deferred Franchise Revenue 1,367,940
Unearned Interest Income 152,060
Deferred Franchise Cost (direct) 820,764
Expense (indirect) 66,397
Cash 887,161
Jan. 10
Deferred Franchise Revenue 1,367,940
Franchise Revenue 1,367,940
Franchise Cost (expense) 820,764
Deferred Franchise Cost (820,764/5) 820,764
Dec. 31
Cash 200,000
Notes Receivable 200,000
Unearned Interest Income 58,315
Interest Income (647,940 x 9%) 58,315
Cash or Receivable (5% x 567,000) 28,350
Franchise Revenue (Continuing fee) 28,350
