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7 since there is no reasonable basis for estimating

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7. Since there is no reasonable basis for estimating the collectibility, the Gwapito Appliance Company usesthe instalment method of recognizing revenue for the following sales:20072008SalesP225,000P337,500Collections from:2007 sales75,00037,5002008 sales-0-112,500Defaults:2007 sales7,50015,0002008 sales-0-30,000Accounts written-off:2007 sales18,75056,2502008 sales-0-18,750Gross profit percentage30%40%What amount should Gwapito Appliance Co. report as deferred gross profit, ending balance in itsDecember 31, 2008 balance sheet?a.P123,750b. P93,750c. P75,000d. P70,500Franchise Accounting
PRACTICAL ACCTG 2Page3of9O SQUARE ACCTG SERVICES
FranchiseAfranchise agreementinvolves the granting of business rights by the franchisor to the franchisee who willoperate the franchise outlet in a certain geographical area or location.Types of Franchise Fee:1.Initial franchise fee.The initial franchise fee is a consideration for the establishment of franchise relationshipproviding some initial services. These services are as follows:a.Assistance in site selection (analyzing location and negotiating lease)b.Evaluation of potential income.c.Supervision of construction activity (obtaining financing, designing building, and supervising contractoron the on-going construction)d.Assistance in the acquisition of signs, fixtures, and equipment.e.Provision of bookkeeping and advisory services (setting up franchisee’s records, advising on income, realestate, other taxes local regulations, etc.)f.Provision of employee and management training.g.Provision of quality controlh.Provision of advertising and promotionWhen is Initial Franchise Fee Recognized as Revenue?Initial franchise feeis recognized as revenue only when the franchisor makes substantial performance of the services it isobligated to perform and collection of the fee is reasonably assured.Substantial performanceoccurs only when the franchisor has no remaining obligation to refund any cash received orexcuse any non-payment of a note and has performed all the initial services required under the contract. Thecommencement of operations by the franchisee shall be presumed the earliest point at which substantial performancehas occurred, unless it can be demonstrated that substantial performance of all obligations, including servicesvoluntarily, has occurred before that time.2.Continuing Franchise fee.Continuing franchise fee is a fee received in return for the continuing rightsgranted by the franchise agreement and providing such services such as management training, advertising,and promotion.When is Continuing Franchise Fee recognized as Revenue?Continuing franchise feeshould be recognized as revenue when they are earned, unless a portion of them has beendesignated for a particular purpose such as providing a specified amount for advertising, building maintenance. In thatcase, the portion deferred shall be an amount sufficient to cover the estimated costs in excess of continuing franchisefees and provide a reasonable profit from continuing services.

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Term
Fall
Professor
NoProfessor
Tags
Balance Sheet, Revenue Recognition, Generally Accepted Accounting Principles, Construction Accounting and Franchise Accounting

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