CHAPTER 8_TEACHER'S MANUAL_AFAR PART 1.docx

CHAPTER 8_TEACHER'S MANUAL_AFAR PART 1.docx

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Chapter 8 Accounting for Franchise Operations – Franchisor PROBLEM 8-1: TRUE OR FALSE 1. FALSE 6. FALSE 2. FALSE 7. FALSE 3. FALSE 8. FALSE 4. FALSE 9. TRUE 5. FALSE 10. TRUE PROBLEM 8-2: THEORY & COMPUTATIONAL 1 C 6 A 2 C 7 C 3 B 8 B 4 A 9 B 5 B 10 D 11. B 12. D 13. Solutions: Step 2: Identify the performance obligations in the contract There is only one performance obligation in the contract, i.e., the promise to grant the license. Since the promise to grant the license is distinct , the entity shall apply the specific principles to determine whether the license provides the customer a right to access or a right to use the entity’s intellectual property. Analysis: a The contract requires ABC Co. to undertake activities that significantly affect the intellectual property to which the customer has rights (i.e., ABC Co. is continually involved in developing further the brand). b The customer is exposed to any positive or negative effects of those activities. c Those activities do not result in the transfer of a good or a service to the customer as those activities occur. 1
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Conclusion: The license provides the customer the right to access the entity’s intellectual property as it exists throughout the license period. Therefore, the performance obligation is satisfied over time . Step 3: Determine the transaction price The transaction price is the fixed payment of 1,400,000. Step 4: Allocate the transaction price to the performance obligations The 1,400,000 transaction price is allocated to the single performance obligation of granting the license. Step 5: Recognize revenue when (or as) a performance obligation is satisfied Since the performance obligation is satisfied over time , the entity recognizes revenue over the license period by measuring its progress towards the complete satisfaction of the performance obligation. The entity shall apply the general principles of PFRS 15 to identify the method that best depicts its performance in the license. Because the contract provides the customer with unlimited use of the licensed characters for a fixed term (i.e., 7 years), the most appropriate measure of progress may be a time-based method (i.e., straight-line method). Journal entries: Jan. 1, 20x1 Cash on hand Contract liability to record the non-refundable initial franchise fee 1,400,00 0 1,400,00 0 July 1, 20x1 No entry Dec. 31, 20x1 Contract liability (1.4M ÷ 7) x 6/12 Revenue to recognize revenue from the franchise 100,000 100,000 PROBLEM 8-3: EXERCISES 1. Solutions: Requirement (a): Step 2: Identify the performance obligations in the contract There is only one performance obligation in the contract, i.e., the promise to grant the license .
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