Question

On January 1, 20x1, an entity grants a franchisee the right to operate a restaurant in a specific market using the entity’s brand name, concept and menu for a period of ten years. The entity has granted others similar rights to operate this restaurant concept in other markets. The entity commonly conducts national advertising campaigns, promoting the brand name, and restaurant concept generally. The franchisee will also purchase kitchen equipment from the entity. The entity will receive ₱950,000 upfront (₱50,000 for the kitchen equipment and ₱900,000 for the franchise right) plus a royalty, paid quarterly, based on 4% of the franchisee’s sales over the life of the contract. The ₱50,000 amount reflects the stand-alone selling price of the kitchen equipment. The entity delivers the kitchen equipment to the customer on February 1, 20x1. The customer commences business operations on April 1, 20x1 and reports total sales of ₱5,000,000 for the year.

How much total revenue should the entity recognize from the contract in 20x1?

Answer 1

Franchisor should recognise following revnues

1. Franchise fee ( But not at single time . it should be recoginsed over the peiod for which franhise is given on reasonable basis )

2. Any commision paid on sales or turnover

3. Any sales made by franchisor to francisee

in the given problem franchisee paid 900,000 for ten years of franchisee. So for every year it is 90,000 only .

Franchise fees foe 20x1 90,000

kitchen equipment 50,000

commission on sales 200,000

Total Revenue to be recognised in 20x1 is 340,000
( i.e., 4% on 5000,000)