Reference no: EM132952798
Dominador's Pizza Inc. enters into a franchise agreement on December 31, 20x7, giving Doming Corp. the right to operate as a franchisee of Dominador's Pizza for 5 years. Dominador's charges Doming an initial franchise fee of P475,000 for the right to operate as a franchisee. Of this amount, P190,000 is payable when Doming 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 31, 20x7.
Rights to the trade name, market area, technical and proprietary know-how. P 190,000.00
Services - training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,591.50
Machinery and equipments, etc. (costing, P95,000). . . . . . . . . . . . . . . . . . . . . . . _133,000.00
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 417,591.50
- The credit rating of Doming 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 Dominador's Pizza Inc. over the payment period. Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Doming holds a grand opening on February 4, 20x8. On February 4, 20x8, franchise opens. Dominador's satisfies the performance obligations related to the franchise rights, training, and equipment
- Doming also promises to pay ongoing royalty payments of 1% of its annual sales (payable every January 31 of the following year) and is obliged to purchase products from Dominador's at its current standalone selling prices at the time of purchase.
Problem 1. How many performance obligations exist in this contract for franchise?
a. 2 c. 4
b. 3 d. 5
Problem 2. When Dominador should recognize revenue for the rights (combined) to the trade name, market area and proprietary know-how which give rise to a single performance obligation?
a. No transaction c. Point in Time
b. No revenue d. Over Time
Problem 3. How much revenue (franchise revenue, service revenue and sales revenue - machinery and equipments) be recognized on December 31, 20x7?
a. Zero. c. P133,000.00
b. P 94,591.50 d. P190,000.00
Problem 4. How much revenue (franchise revenue, service revenue and sales revenue - machinery and equipment) be recognized on February 4, 20x8?
a. P 94,591.50 c. P190,000.00
b. P133,000.00 d. P417,591.50
Problem 5. How much continuing franchise revenue be recognized on December 31, 20x8, assuming the sales of P4,987,500 was generated for the first year of operations ?
a. Zero. c. P190,000.00
b. P 49,875.00 d. P417,591.50
Problem 6. How much total franchise revenue (in relation to Nos. 4 and 5) on December 31, 20x8?
a. P372,466.50 c. P417,591.50
b. P390,673.82 d. P467,466.50
Problem 7. In relation to No. 6, the net income on December 31, 20x8 amounted to?
a. Zero. c. P390,673.82
b. P 372,466.50 d. P467,466.50