Franchise'R'Us Corp. (FRU) Financial Transactions

Use the following information to answer questions 1 to 3. Round all percentages to one

decimal place (for example, 45.2%).

Franchises‘R’Us Corp. (FRU) is a franchisor that owns the rights to Mega Foods (MF). FRU

sells MF franchises to the franchisees. Included in the initial franchise package is startup

assistance and the required equipment. FRU provides sales and marketing services and

operational support to its franchisees on an ongoing basis. The fees for sales and marketing

services are based on the annual sales revenue generated by the franchisee.

FRU prepares its financial results in accordance with IFRS. The company only prepares

adjusting entries and accruals at year end, which is December 31.

On January 1, 20X3, FRU sold an MF franchise to New Operators Corp. (NOC). Details of

this transaction are as follows:

* The franchise agreement entitled NOC to operate an MF outlet for six years (January 1,

20X3, to December 31, 20X8).

* NOC was required to pay an initial fee of $380,000 cash on January 1, 20X3, and six

annual payments of $50,000 due on December 31 each year, with the first payment due

on December 31, 20X3.

* On January 1, 20X3, FRU delivered the equipment to NOC. The fair market value (standalone selling price) of the equipment and startup assistance was $475,000.

* FRU does not offer operational support on a stand-alone basis. FRU’s normal costs of

providing these services are $20,000 per annum. FRU’s usual markup on costs for similar

services that it provides is 30%.

* FRU determined that a 6% discount rate appropriately reflects NOC’s underlying credit

risk.

* FRU determined that the provision of the equipment and startup assistance, the

operational support and the sales and marketing services are each distinct performance

obligations.

1. What amount of the initial transaction price will be allocated to revenue for the equipment

sales and provision of startup assistance performance obligation?

a) $471,277

b) $475,000

c) $512,040

d) $625,866

2. Assume that the franchise agreement required NOC to pay FRU an annual sales and

marketing fee first due on January 15, 20X4, equal to 5% of its gross franchise sales for

the preceding calendar year. On January 1, 20X3, FRU estimated that the most likely

amount of NOC’s annual sales for 20X3 to 20X8 would be $4,000,000. Given the new

nature of the operation, FRU believed it highly probable that a significant reversal of the

consideration would occur. At year end, before FRU finalized its financial statements, it

was determined that NOC’s actual sales in 20X3 were $3,800,000.

Which of the following best describes the required adjustment to FRU’s statement of

comprehensive income for its year ended December 31, 20X3, pertaining to the sales and

marketing services fee?

a) No adjustment is required, as the payment is not due until January 15, 20X4.

b) Revenue for the provision of sales and marketing services will be decreased by

$10,000.

c) Revenue for the provision of sales and marketing services will be increased by

$190,000.

d) Revenue for the provision of sales and marketing services will be increased by

$200,000.

3. Assume that the franchise agreement required NOC to pay FRU an annual sales and

marketing fee first due on January 15, 20X4, equal to 5% of its gross franchise sales for

the preceding calendar year. Given the new nature of the operation, FRU believed it highly

probable that a significant reversal of the consideration would occur.

What amount will FRU report as a contract liability (deferred revenue) as at December 31,

20X3?

a) $114,072

b) $128,824

c) $130,000

d) $154,589

4. According to IFRS 15 Revenue from Contracts with Customers, which of the following is a

criterion for the recognition of revenue?

a) The terms of the contract only need to be approved by one of the parties.

b) It is uncertain if the entity will collect the consideration that was exchanged for goods

or services.

c) The transaction price of the contract is fixed.

d) The cash flow from the assets given up differs from that of the assets being received.

5. We Sell on Credit Terms Corp. (WSC) is a manufacturer that offers its wholesale

customers 30-day credit terms. Details of WSC’s credit-related transactions in 20X5

follow:

* WSC recorded $3,000,000 in sales, 90% of which were sold on account.

* WSC’s allowance for doubtful accounts (AFDA) balance as at December 31, 20X4,

was $58,250.