Dominador’s Pizza Inc. enters into a franchise agreement on December 31, 20x7, giving Dian Jaycerette the right to operate as a franchisee of Dominador’s Pizza for 5 years. Dominador’s charges Dian Jaycerette an initial franchise fee of P570,000 for the right to operate as a franchisee. Of this amount, P228,000 is payable when Dian Jaycerette signs the agreement, and the balance is payable in five annual payments of P68,400 each on December 31. The credit rating of Dian Jaycerette indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P68,400 each discounted at 8% is P272,916. The unearned interest income or discount on notes amounted to P69,084 [(P68,400 x 5 years) less P272,916] represents the interest revenue to be accrued by Dominador’s Pizza Inc. over the payment period. The transaction price then amounted to P500,916 computed as follows: Down payment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 228,000.00 PV of an ordinary annuity of 8% for 5-years: (P68,400 x 3.99). . . . . . . . . . . . . . . . _272,916.00 Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 500,916.00 Consider the following for the allocation of the transaction price on December 31, 20x7: Rights to the trade name, market area, technical and proprietary know-how. P 228,000.00 Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,316.00 Machinery and equipments, etc. (costing, P114,000). . . . . . . . . . . . . . . . . . . . . . . _159,600.00 Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 500,916.00 Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Dian Jaycerette 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. Dian Jaycerette also promises to pay ongoing or continuing fee (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 stand-alone selling prices at the time of purchase. Required: Prepare any journal entries to record the revenue arrangement on: December 31, 20x7, the date of signing and receipts of upfront payment. February 1, 20x8, training is completed. February 4, 20x8, franchise outlet opened. December 31, 20x8, ongoing or continuing fee/royalty received. Determine the following: How many performance obligations exists in this contract
Dominador’s Pizza Inc. enters into a franchise agreement on December 31, 20x7, giving Dian Jaycerette the right to operate as a franchisee of Dominador’s Pizza for 5 years. Dominador’s charges Dian Jaycerette an initial franchise fee of P570,000 for the right to operate as a franchisee. Of this amount, P228,000 is payable when Dian Jaycerette signs the agreement, and the balance is payable in five annual payments of P68,400 each on December 31.
The credit rating of Dian Jaycerette indicates that money can be borrowed at 8%. The present value of an ordinary annuity of five annual receipts of P68,400 each discounted at 8% is P272,916. The unearned interest income or discount on notes amounted to P69,084 [(P68,400 x 5 years) less P272,916] represents the interest revenue to be accrued by Dominador’s Pizza Inc. over the payment period.
The transaction price then amounted to P500,916 computed as follows:
|
Down payment.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
P 228,000.00 |
|
PV of an ordinary annuity of 8% for 5-years: (P68,400 x 3.99). . . . . . . . . . . . . . . . |
_272,916.00 |
|
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
P 500,916.00 |
Consider the following for the allocation of the transaction price on December 31, 20x7:
|
Rights to the trade name, market area, technical and proprietary know-how. |
P 228,000.00 |
|
Services – training, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
113,316.00 |
|
Machinery and equipments, etc. (costing, P114,000). . . . . . . . . . . . . . . . . . . . . . . |
_159,600.00 |
|
Total transaction price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
P 500,916.00 |
Training is completed in February 1, 20x8, the equipment is installed in February 2, 20x8, and Dian Jaycerette 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.
Dian Jaycerette also promises to pay ongoing or continuing fee (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 stand-alone selling prices at the time of purchase.
Required:
- Prepare any
journal entries to record the revenue arrangement on: - December 31, 20x7, the date of signing and receipts of upfront payment.
- February 1, 20x8, training is completed.
- February 4, 20x8, franchise outlet opened.
- December 31, 20x8, ongoing or continuing fee/royalty received.
- Determine the following:
- How many performance obligations exists in this contract
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