tive's trade name and sell Native's products for 10 years. In addition, Native also promises to provide the equipment necessary to operate the franchise store. The contract states a fixed consideration of P450,000 and a 5% sales-based royalty. The fixed consideration includes P150,000 payment for the equipment. This reflects the stand-alone selling price of the equipment. Native Co., as a franchisor, has developed customary business practice to undertake activities such as analyzing the customer's changing preferences and implementing product improvements, pricing str
tive's trade name and sell Native's products for 10 years. In addition, Native also promises to provide the equipment necessary to operate the franchise store. The contract states a fixed consideration of P450,000 and a 5% sales-based royalty. The fixed consideration includes P150,000 payment for the equipment. This reflects the stand-alone selling price of the equipment. Native Co., as a franchisor, has developed customary business practice to undertake activities such as analyzing the customer's changing preferences and implementing product improvements, pricing str
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
On January 1, 20x1, Native Co. enters into a contract to grant a franchisee the right to
use Native's trade name and sell Native's products for 10 years. In addition, Native also promises to provide the equipment necessary to operate the franchise store. The contract states a fixed consideration of P450,000 and a 5% sales-based royalty. The fixed consideration includes P150,000 payment for the equipment. This reflects the stand-alone selling price of the equipment. Native Co., as a franchisor, has developed customary business practice to undertake activities such as analyzing the customer's changing preferences and implementing product improvements, pricing strategies, marketing campaigns and operational efficiencies to support the franchise name. Native delivers the equipment to the customer on February 1, 20x1. The customer commences business operations on March 1, 20x1, at which date the 10-year license period starts to run. The franchisee reports sales of P1,200,000 for the year.
Requirements:
a. Determine the following:
i. the performance obligations in the contract and how these will be satisfied.
ii. the transaction price
iii. how the transaction price is allocated
iv. how revenue will be recognized from the contract.
b. Provide the journal entries in 20x1
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