PARTNERSHIP - PROBLEMS

1. CC, PP and AA, accountants agree to form a partnership and to share profits in the
ratio of 5:3:2. They also agree that AA is to be allowed a salary of P28,000 and that PP
is to be granted P21,000 as his share of the profits. During the first year of operation,
income from fees are P180,000 while expenses total P96,000. What amount of net
income should be credited to each partner’s capital account?

A.) CC, P28,000; PP, P16,800; AA, P11,200

B.) CC, P25,000: PP, P21,000; AA, P38,000
C.) CC, P24,000; PP, P22,000; AA, P38,000
D.) CC, P25,000; PP, P21,000; AA, P39,000

SOLUTION:

Revenue P 180,000
Expenses (96,000)
Net income P 84,000

CC PP AA Total
28,000 28,000
28,000 16,800 11,200 56,000
( 3,000) 4,200 ( 1,200) 0
25,000 21,000 38,000 84,000

2. On June 30, 2017, the condensed balance sheet of the partnership DD, FF, and GG,
together with their respective profit and loss sharing percentage was as follows:

Assets, net of liabilities P 320,000

DD, capital (50%) P 160,000
FF, capital (30%) 96,000
GG, capital (20%) 64,000
P 320,000

DD decided to retire from the partnership and by mutual agreement is to be paid

P180,000 out of partnership funds for his interest. Total goodwill or adjustment of assets
implicit in the agreement is to be recorded. After DD’s retirement, what are the capital
balances of the other partners?

A.) FF GG
84,000 56,000
B.) FF GG
102,000 68,000
 C.) FF GG
108,000 72,000
D.) FF GG
120,000 80,000

SOLUTION:

Agreed payment to DD 180,000

Book Value (50%) (160,000)
20,000
divided by 50%
40,000

FF: 40,000 * 30% = 12,000 + 96,000 = 108,000

GG: 40,000 * 20% = 8,000 + 64,000 = 72,000

3. A balance sheet for partnership of KK, LL, and MM who share profits 2:1:1
respectively, show the following balances just before liquidation:

Cash P 48,000
Other assets 238,000
Liabilities 80,000
KK, capital 88,000
LL, capital 62,000
MM, capital 56,000

In the first month of liquidation, P128 000 was received in the sell of certain assets.
Liquidation expenses of P4,000 were paid and additional liquidation expenses of P3,200
are anticipated before liquidation is completed. Creditors were paid P22,400. Available
cash were distributed to the partners. The cash to be received by each partner based
on the above data:

A.) KK, P56,600; LL, P21,300; MM, P28,300

B.) KK, P86,000; LL, P61,000; MM, P55,000
C.) KK, P29,400; LL, P32,700; MM, P26,700
D.) KK, P88,000; LL, P62,000; MM, P56,000
SOLUTION:

Cash Balance P 48,000

Sale 128,000
Expenses: ( 4,000)
(80,000)
( 3,200)
P 88,800

KK LL MM Total
88,000 62,000 56,000 200,000
(58,600) (24,300) (24,300) (117,200)
29,400 32,700 26,700 88,800

4. – 5.
Rosa, Susan and Tina are partners sharing profits on a 5:3:2 ratio. On January 1, 2017,
Vida was admitted into the partnership with a 20% share in the profits. The old partners
continue to participate in their original ratios.

For the year 2017, the partnership book showed a net income of 25,000. It was
disclosed, however, that the following errors were committed:

2016 2017
1. Accrued expenses not recorded at yearend 1,200
2. Inventory overstated 3,100
3. Purchases not recorded, for which goods
have been received and inventories. 2,000
4. Income received in advance not adjusted 1,500
5. Unused supplies not taken up at yearend 900

4. The new profit and loss ratio of Rosa, Susan, Tina, and Vida respectively for 2017 is

A.) 40%, 25%, 15%, 20%

B.) 50%, 20%, 10%, 20%
C.) 45%, 30%, 15%, 20%
D.) 40%, 24%, 16%, 20%
SOLUTION:

Rosa: 50% * 80% = 40%

Susan: 20% * 80% = 24%
Tina: 20% * 80% = 16%
Vida: 20%
100%

5. The share of partner Rosa in the 2017 corrected net income is:

A.) P9,400
B.) P10,000
C.) P11,750
D.) P12,500

SOLUTION:

NI per books P 25,000

Add (deduct): adjustments
Accrued expenses 1,200
Inventory overstatement (3,100)
Purchase not recorded (2,000)
Income received in advance (1,500)
Unused supplies (900)
Adjusted NI 23,500
P/L Ratio 40%
Profit share or Rosa P 9,400

6. – 7.

AA admits BB as a partner in business. Accounts in the ledger for AA on November 20,

2017, just before the admission of BB, show the following balances:

Cash P 6,800
Accounts receivable 14,200
Merchandise inventory 20,000
Accounts payable 8,000
AA, capital 33,000
It is agreed that for the purpose of establishing AA’s interest the following adjustments
shall be made:

1. An allowance for doubtful accounts of 3% of accounts receivable is to be

established.
2. The merchandise inventory is to be valued at P 23,000.
3. Prepaid salary expenses of P600 and accrued rent expense of P800 is to be
recognized.

6. BB is to invest sufficient cash to obtain 1/3 interest in the partnership. AA’s adjusted
capital before admission of BB is

A.) P28,174
B.) P35,347
C.) P35,374
D.) P36,374

7. The amount of cash invested by BB

A.) P11,971
B.) P14,087
C.) P17,687
D.) P18,487

SOLUTION:

33,000 – (3%*14,200) + (23,000 – 20,000) + 600 – 800 = 35,374

35,374 * 2/3 = 53,061 – 35,374 = 17,687

8. A partnership begins first year with the following capital balances:

Arthur, capital P 60,000

Baxter, capital 80,000
Cartwright, capital 100,000

The articles of partnership stipulate that profits and losses be assigned in the following
manner:

1. Each partner is allocated interest equal to 10 percent of the beginning capital

balance.
2. Baxter is allocated compensation of P20,000 per year.
3. Any remaining profits and losses are allocated on a 3:3:4 basis respectively.
 4. Each partner is allowed to withdraw up to P5,000 cash per year.

Assuming that the net income is P50,000 and that each partner withdraws the maximum
amount allowed, what is the balance in Cartwright’s capital account at the end of the
year?

A.) P105,800
B.) P106,200
C.) P106,900
D.) P107,400

SOLUTION:

Arthur Baxter Cartwright Total

Interest – 10% 6,000 8,000 10,000 24,000
Salary 20,000 20,000
Remainder(3:3:4) 1,800 1,800 2,400 6,000
Total 7,800 29,800 12,400 50,000

9. UU and VV drafted a partnership agreement that lists the following assets contributed
at the partnership’s formation:

UU VV
Cash P 20,000 P 30,000
Inventory 15,000
Building 40,000
Furniture & Equipment 15,000

The building is subject to a mortgage of P 10,000, which the partnership has assumed.
The partnership agreement also specifies that profits and losses are to be distributed
evenly. What amounts should be recorded as capital for UU and VV at the formation of
the partnership?

UU VV
A.) 35,000 85,000
B.) 35,000 75,000
C.) 55,000 55,000
D.) 60,000 60,000
SOLUTION:

UU: 20,000 + 15,000 = P35, 000

VV: 30,000 + 15,000 + 40,000 – 10,000 = P75,000.

10. Fea, Gina and Hana are partners with average capital balances during 2010 of 120
000, 60 000 and 40 000, respectively. Partners receive 10% interest on their average
capital balances. After deducting salaries of 30 000 to Fea, and 20 000 to Hana, the
residual P/L is divided equally. In 2017, the partnership sustained a 33 000 loss before
interest and salaries to partners. By what amount should Fea’s capital change?

A.) 7 000 increase

B.) 11 000 increase
C.) 35 000 decrease
D.) 42 000 increase

SOLUTION:

Fea: 12 000 + 30 000 – 35 000 = 7 000

11. Victor and Victoria are partners with capital balances of P30, 000 and P70, 000,
respectively. Victor has a 30% interest in profits and losses. All assets of the partnership
are at fair market value except equipment with book value of P300, 000 and fair market
value of P320, 000. At this time, the partnership has decided to admit Wendy and Yvon
as new partners. Wendy contributes cash of 55, 000 for 20% interest in capital and 30%
interest in profits and losses. Yvon contributes cash of P10, 000 and equipment with a
fair value of P50, 000 for a 25% interest in capital and 35% interest in profits and losses.
Yvon is also bringing special expertise and client contacts into the new partnership.

Using the bonus method, what is the amount of bonus?

A.) 24, 750
B.) 18, 250
C.) 14, 000
D.) 7, 500
SOLUTION:
Contributed Capital Agreed Capital Increase (Decrease)
Old Partners P 100, 000 P 118, 250 P 18, 250
New Partners 115, 000 (45%) 96, 750 (18, 250)
Total P 215, 000 P 215, 000

12. Anthony and Benjie formed a partnership and agreed to divide initial capital equally,
even though Anthony contributed P500,000 and Benjie contributed P74,000 in
identifiable assets. Under the bonus method, to adjust capital accounts, Benjie's
intangible assets should be debited for:

A.) 0
B.) 16,000
C.) 8,000
D.) 46,000

EXPLAINATION:

Zero, because under the bonus method, a transfer of capital is only required.

13. The XYZ partnership reports net income of P60000. If partners X, Y, and Z have
income ratio of 50%, 30%, and 20%, respectively. What is the share of Partner Z from
the net income of the partnership, if he was given a capital ratio of 25%?

A.) 30000
B.) 12000
C.) 18000
D.) 15000

SOLUTION:
60,000 x20% = 12,000
14. Partnership A has an existing capital of P70,000. Two partners currently own the
partnership and split profits 50/50. A new partner is to be admitted and will contribute
net assets with a fair value of P90,000. For no goodwill or bonus (depending on
whichever method is used) to be recognized, what is the interest in the partnership
granted the new partner?

A.) 33.33%
B.) 50.00%
C.) 56.25%
D.) 75.00%

SOLUTION:
Capital contributed by the new partner 90,000
Divide by total contributions (70,000+90,000) 160,000
New partner’s interest 56.25%

15. – 16.
As of December 31, the books of MKI Partnership showed capital balances of M =
40,000, K = 25,000 and I = 5,000. The partner’s profit and loss ratio was 3:2:1,
respectively. The partners decided to dissolve and liquidate. They sold all the non-cash
assets for 37,000 cash. After settlement of all liabilities amounting to 12,000, they still
have 28,000 cash left for distribution.

15. The loss on the realization of the non-cash assets was

A.) 40,000
B.) 42,000
C.) 44,000
D.) 45,000

SOLUTION:
Total capital before liquidation (40,000+25,000+5,000) 70,000
Less: Cash left for distribution 28,000
Loss on realization of the non-cash assets 42,000
16. Assuming that any partner’s capital debit balance is uncollectible, the share of M in
the 28,000 cash for distribution would be

A.) 19,000
B.) 18,000
C.) 17,800
D.) 40,000

SOLUTION:
M K I
Capital balances before Liquidation 40,000 25,000 5,000
Loss on Realization (21,000) (14,000) (7,000)
Balances 19,000 11,000 (2,000)
Absorption of I (3:2) (1,200) (800) 2,000
Cash Payment to M & K 17,800 10,200

17. In the VW partnership, Vallen's capital is P140,000 and Waren's is P40,000 and
they share income in a 3:1 ratio, respectively. They decide to admit David to the
partnership. Vallen and Waren agree that some of the inventory is obsolete. The
inventory account is decreased before David is admitted. David invests P40,000 for a
one-fifth interest. What is the amount of inventory written down? 

A.) P4,000
B.) P20,000
C.) P15,000
D.) P10,000

SOLUTION:

Total Agreed Capital after admission of David:

(40,000*5) 200,000
Less: Contribution/Investment of David 40,000
Capital Balances of AD before admission of David 160,000
Capital Contribution (140,000+40,000) 180,000
Reduction of inventory 20,000
18. On May 1, 2017, Aww and Meow formed a partnership and agreed to share profits
and losses in the ratio of 3:7, respectively. Aww contributed a parcel of land that cost
her P10,000. Meow contributed P40,000 cash. The land has a fair value of P15,000.
Aww insisted that the value of the land should be P18,000. The partners agreed to
value the land at P18,000. What amount should be recorded in Aww’s capital account
on formation of the new partnership?

A.) P18,000
B.) P17,400
C.) P15,000
D.) P10,000

19. – 20.

In the first year of the operation, Elisan and Company, a partnership, made a net
income of P20,000, before providing for a salaries of P5,000 and P3,000 per annum for
Elisan and Kapalit, respectively, as stipulated in the partnership agreement. Capital
contributions and profit-sharing are as follows:

Capital Profit share

Elisan P30,000 40%
Kapalit P20,000 30%
Bakus P10,000 30%
P60,000 100%

19. How much profit share would Bakus be entitled to?

A.) P6,000
B.) P4,500
C.) P3,600
D.) None of the above

SOLUTION:

Elisan(40%) Kapalit(30%) Bakus(30%) Total

Salaries P5,000 P3,000 P8,000
Remainder P4,800 P3,600 P3,600 P12,000
 Total P9,800 P6,600 P3,600 P20,000

20. Assuming no profit and loss ratio provided in the partnership agreement and that
there has been no change in the capital contribution during the year, how much profit
share would Elisan be entitled to receive?

A.) P6,000
B.) P4,500
C.) P3,600
D.) None of the above

SOLUTION:

Elisan(3/6) Kapalit(2/6) Bakus(1/6) Total

Salaries P5,000 P3,000 P8,000
Remainder P6,000 P4,000 P2,000 P12,000
Total P11,000 P7,000 P2,000 P20,000

1. Alamo Company has two merchandise outlet, its main store and its bonomo branch. All
purchases are made by the main store and shipped to the branch at cost plus 10%. On
January 1 2011, the main store and bonomo inventories were 17,000 and 4 950 respectively
. during 2011 the main store purchased merchandise costing P 50,000 and shipped 40% of
it to bonomo, at December 31 2011 bonomo made the following closing entry:

Sales ----------------------40,000
Inventory ----------------6,050
Shipments from main store------------22,000
Expenses-----------------------------------13,100
Inventory----------------------------------4,950
Main store---------------------------------6000
Compute the (1)actual branch income for 2017 on a cont basis assuming generally accepted
accounting principles and (2) the combined cost of goods main store inventory at December
31, 2011 is P14,000.

Solution:
1)
Sales P40000
Less: cost of good sold:
Inventory,1/1/2011(4950/110%) P4500
Add: shipments (22,000/110%) P 20000
 COGAS P24,000
Less: inventory 12/31/2011 5500 P19000
6060/110%
Gross profit P21500
Less: Expenses P13100
Net income from own operations PP7900
2) Combined of goods sold:
Merchandise inventory 1/1/2011-----------------------P17,000
Of branch cost P4950/110%---------------------------------P4500 P21,000
Add: purchases-----------------------------------------------------------P50,000
COGAS-------------------------------------------------------------------------P 71500
Less:Merchandise Inventory12/31/2011----------------P 14,000
Of Branch costP 6050/100%------------------------------- 5000 P19,500
Cost of Good Sold P 52,000
2. The franchise agreement between hunger Queen and Geri ehich was signed out at the
beginning of the year requested a P 5,000,000 franchise for payable P1,000,000
Upon signing of the franchise and the balance in four annual instalments starting the end of
the current year. At the time of granting of the franchise, the present value using 12% as
discount rate of the four instalments would approximate P1,996,500. The fees once paid are
not refundable. The franchise may be cancelled subject to the provisions of the agreement.
Should there be unpaid franchise fees attributed to the balance of the main fee( 5,000,000),
same would become due and demandable upon cancellation.As of the signing of the
franchise agreement Burger Queen unearned franchise fee amounted to :

Solution:

Cash Notes receivable

Services YES YES
Period of Refund YES YES
Collectibility not reasonably assured
P1,000,000 P1, 996,500
Status Revenue liability

3. Speed Racer, Inc. charges an initial franchise fee of P75,000 for the right to operate as a
franchisee of speed racer. Of this amount, 25,000 is collected immediatedly. The remainder
is collected in four equal annual payments instalments of 12, 500 each. These instalments
have a present value of P 39, 623. There is reasonable expectation that the down payment
may be refunded and substatntial future be performed by Speed RACER Inc.

Solution:

Cash Notes Receivable

Services No No
 Period of refund No No
Collectability reasonably assured P 50,000

Status Liability/ Unearned Liability/Unearned

4. Dj builders enterprises, a franchisor, charges franchisees a ‘ franchisees a “franchise fee” of
500,000 of this amount, a non refundable P 200,000 is paid upon the signing of the contract
with the balance payable in three equal instalments after each year thereafter. Dj builders
will assist in locating a suitable business site conduct a market study oversee the
construction of facilities , and provide initial training of employees.

On December 1, 2018 ,dj builders signed a franchising agreement for the U-belt area. By the
end of 2018, it was determinded that the substantial performance of the initial services had
cost Dj builders a total of a P150,000 And that collection of the balnce of the Franchise fee
has been reasonably assured. In its 2018 income statement ,Dj builder should report
franchise revenue and Net income :

Solution:

Cash N/R

Services YES YES

Period of refund YES YES

Collectibility REASSURED

200,000 300,000

STATUS REVENUE REVENUE

THE NET INCOME THEN WOULD BE AS FOLLOWS :

FRANCHISE REVENUE P 500.,000

LESS: COST OF Franchise P 150,000

Net income: P 350,000

5. During 2016, de pedro corporation sold merchandise costing P 2,100,000 on an instalment

basis for 3,000,000. The cash receipts related to this sales were collected as follows 2016 P
1, 200,000 2017 P750,000 2018 1050,000 2019 P750,000. What is the rate of gross profit
on the install ment sales made by de Pedero Corporation during 2016?

Solution: 9P3,000,000-2,100,000)/3000,000= 30%

 6. On January 1, 2015 Finding Memo, Inc. entered into a franchise agreement with a
company allowing the company to do business under Finding Memo’s name. Finding
Memo had performed substantially all required services by January 1, 2015, and the
franchisee paid the initial franchise fee of ₱105,000 in full on that date. The
franchise agreement specifies that the franchisee must pay a continuing franchise
fee of ₱9,000 annually, of which 20% must be spent on advertising by Finding
Memo. What entry should Finding Memo make on January 1, 2015 to record receipt
of the initial franchise fee and the continuing franchise fee for 2015?

a. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 9,000
b. Cash 114,000
Unearned Franchise Fees 114,000
c. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 7,200
Unearned Franchise Fees 1,800
d Prepaid Advertising 1,800
. Cash 114,000
Franchise Fee Revenue 105,000
Revenue from Continuing Franchise Fees 9,000
Unearned Franchise Fees 1,800

7. On January 1, 2018 Sumugat Co. sold land that cost ₱210,000 for ₱280,000, receiving a
note-bearing interest at 10%. The note will be paid in three annual installments of
₱112,595 starting on December 31, 2015. Because collection of the note is very uncertain,
Sumugat will use the cost-recovery method. How much revenue from this sale should she
recognize in 2018?
a. ₱ 0
b. ₱21,000.
c. ₱28,000.
d. ₱70,000

Answer is A.

8.
On Jan 1 ,2016 finding Memo INC. entered into a franchise agreement with a company
allowing the company to do business under finding memo’s name. finding memo had
performed substantially all required services by January 1, 2016 and the franchise paid
initially franchise fee of P 105 000 in full on that date . the franchisee must pay a continuing
franchise fee of P 9000 annually, of which 20% must be spent on advertising by finding
Memo. What entry should finding memo make on January 1 2016 to record receipt of the
initial franchise fee and the continuing franchise fee for 2016?

Answer:

Cash 114,000

Franchise fee revenue 105,000

Revenue from continuing franchise fee 7,200

Unearned franchise fees 1,800

9. blue ball co. charges P 90000 for a franchise, with P18,000 paid when the agreement is
signed and the balance in four annual payments. The present value of annual payments
discounted at 9% is P 58, 315. The franchise has the right to purchase P20,000 of
equipment for 16,000 of collectability of the payments is reasonably assured and
substantial performance by blue ball has occurred, what is the amount of revenue from
franchise fee that should be recognize?

Down payment 18,000

Add:Present value of equal annual payments(200,000*2.91) 582,000

Total franchisefee, 76,315

Less: loss on sale of equipment 4000

Net revenue from franchise fee 72,315 answer

10. On January 1, 2010, crimson red co. purchased a franchise with a useful life of ten years
or 50,000. An additional franchise fee of 3% of franchise operation revenues must be paid
each year to the franchisor. Revenues from franchise operations amounted to 400,000
during 2010. In its December 31, 2009 balance sheet what amount should crimson red
report as an intangible asset- franchise?

Answer: 45,000

Acquisition cost 50, 000

Less: franchise amortization (50000/10) 5,000

Franchise, Dec.31, 2010 45,000

11. On May 1, 2016, Baliwag’slechon Inc. a franchisor entered into a franchise agreement with
Mr. Godobe. The initial franchise fee is 500,000 of which 100,000 is payable in cash upon
signing of the franchise agreement and the balance evidence by 12% promissory note. As of
December 31, 2016. the franchisor falls to render substantial services and none thus far had been
rendered to franchisee. When the entity prepares its financial statements the revenue from
franchisee’s fee to be reported is:
Answer is 0.
No revenue is to be reported. Because the franchisor falls to render substantial services to the
franchisee as of Dec 31, 2016.

12. On September 1, 2017 KFC sells a franchise for 5,000,000. on September, the contract was
signed and paid in full. On October, franchisee commenced operations after substantial services
were rendered at a cost of 50,000. What is the net income by the franchisor on Dec. 31?
Answer: 4,950,000
Solution:
Initial franchise fee P500,000
Less: cost of franchise 50,000
Net income: 4,950,000
13. On July 1, 2007 Cotton candy corp. signed an agreement to operate as a franchise of ace
printers for an initial franchise of P1,200,000. On the same date , cotton candy paid P 400,000
amd agreed to pay the balance in four equal annual installments of 200,000 beg. July 1.
Present value of P1 a 14% 4 periods 0.59
Present value of an annuity of P1 at 14% for 4 periods 2.91
Future amount of 1 at 14% for 4 periods 1.69
Answer: 982,000
Down payment 400,000
Present value of equal annual payment 582,000
Amount of franchise date of acquisition 982,000

14. on June 6 2010, crimson red co. purchased a franchise with a useful life of ten years or
50,000. An additional franchise fee of 3% of franchise operation revenues must be paid each
year to the franchisor. Revenues from franchise operations amounted to 400,000 during 2009, in
its December 31,2010 balance sheet, what amount should crimson red report as an intangible
asset franchise?
Answer: 45,000
Acquisition cost 50,000
Less: franchise amortization (50000/10) 5,000
Franchise Dec. 31 2010 45,000

15. Assume that Jollibee Inc. chargers an initial franchise fee of P5,000,000for the right to
operate a franchise of Jollibee of the amount P1,000,000 is payable when the agreement is signed
and the balance is payable in five annual payments of 800,000 each. in return for that annual
franchise fee the franchisor will help locate the sale, negotiable the lease of the sale supervise the
construction activity and provide the bookkeeping services. The credit rating of the franchise
indicates that money can be borrowed at 24%.

If there is reasonable expectation that the down payment may be refunded and if substantial
future services remained to be performed by Jollibee Inc. the unearned interest income receivable
would be:
Answer: 1,803,600
Pv of ordinary annuity of P1 at 24%for 5 periods
=1-1.24/ 24
=2,7454
PV of an ordinary annuity of five annual receipts of 600,000 at 24%
=800,000*2.7454
= 2916,000
Unearned interest income discount on notes receivable
=4,000,000*2196,320
=1,803,600

16.Robins Inc. sells franchise for Ice Cream outlets in Metro Manila. One contract has been singed on
January 15, 2015. The agreement calls for an initial franchise fee of P 6,000,000. By the franchise at the
signing of the contract. The franchisor’s initial cost of services is P 2,250,000, to be incurred uniformly
over the six-month period prior to the scheduled opening date of July 15, 2015. No future payments are
to be made by the franchisee, although there will be continuing costs of P 180,000 per year for services
rendered during the ten year term of contract. The normal return for the franchisor on continuing
operations involving and franchise outlets is 10%.

How much net income would be recognized by the franchisor on July 15, 1996?

P 3,750,000

P 5,750,000

P 6,000,000

P 1,750,000

ANSWER:

Initial Franchise Fee 6,000,000

Less: Value of continuing 2,000,000
costs(180,000/90%)x10
Adjusted franchise fee 4,000,000
Less: Initial expenses 2,250,000
Net Income 1,750,000
17. Mr. Villa is about to purchase a franchise from Pizza, Inc. The standard contract provides for a 10-
year term and an initial franchiser fee of P 450,000, payable as follows: P 150,000 at the date of signing.
The expected date of signing is January 1, 2016. A continuing fee of 2% of gross sales is also to be paid to
the franchisor. Monthly gross sales are expected to be P 200,000 for the first four years and P 375,000
for the remainders of the contract. An additional P 50,000 for initial services are insured on January
17,2016. There are no associated continuing costs.

The net income to the recognized by Pizza Inc. for the fiscal year ending December 31, 1996 is:

P 444,000

P 140,400

P 240,400

P 440,800

ANSWER:

Initial Franchise Fee 450,000

Continuing fee (P200,000x2%)x 11 months 44,000
Total 494,000
Initial Expenses 50,000
Net Income 444,000

18.

On July 2015, Tiam signed to operate as franchisee of Andok’s Company for 50,000. 100,000
was paid upon signing and the rest were evidenced by a 12% note payable in two annual
payments of 200,000 each beginning December 31,2015. Tiam commenced operations on
November 2, the first installment was collected on due date. If the note is assured to be
collected, what is the revenue from franchise fee to be reported by Andok in its financial
statements on December 31?

(a.) 100,000

(b.) 400,000

(c.) 500,000
 (d.) 0

Solution:

The total initial franchise fee of P500,000 is to be recognized as earned because the
collectability of the note for the balance is reasonably assured.

19.) From the previous question, assuming collectability is not assured, using cash basis of
revenue recognition, what will be the revenue from initial franchise fee?

(a.) 0

(b.) 100,000

(c.) 300,000

(d.) 500,000

Solution:

Cash down payment P 100,000

Collection of note applying to principal __200,000

Revenue from initial franchise fee P 300,000

20.) Mr. Roxas signed an agreement with Hotdog,Inc. for an initial franchise fee of 1,200,000.
Upon signing, he paid 400,000 and agreed to pay the balance in 4 equal annual payments
starting July 1, 2016. Mr. Roxas can borrow at 14% for a loan of this type. On July 1, 2015, when
the initial franchise fee is received, what is the unearned interest income recorded by
Hotdog,Inc. ?

(a.) 0

(b.) 200,000

(c.) 218,000

(d.) 290,000

Solution:
Face value of the note (P1,200,000 - P400,000) P 800,000

Present value of the note (P200,000 X 2.91) __582,000

Unearned interest income, July 1, 2008 P 218,000