On December 1, 20x1, CANOROUS Co. granted a 5-year franchise right to MELODIOUS, Inc. for an initial franchise fee of ₱400,000 and a 10% sales-based royalty. The initial franchise fee is non-refundable and due upon signing of the contract. At contract inception, CANOROUS determines that the nature of its promise to grant the license is to provide the customer with the right to access CANOROUS’s intellectual property as it exist throughout the license period. As of December 31, 20x1, CANOROUS has no remaining obligation or intent to refund any of the cash received, all the initial services necessary to setup the contract have been performed, and MELODIOUS started operating the franchised business. MELODIOUS reported sales of ₱800,000 for 20x1. On December 31, 20x1, Entity A enters into a contract with Customer X to transfer a license for a fixed fee of ₱100,000 payable as follows: 20% is payable upon signing of contract. 80% is represented by a note receivable collectible in 4 equal annual installments starting December 31, 20x2. The appropriate discount rate is 12%. Case #2 The license provides Customer X the right to use Entity A’s patented processes. The agreement requires Customer X to discontinue using its trade name and instead use Entity A’s trade name. Customer X is bound by the terms of the contract to abide with Entity A’s policies on the use of the processes but is given the right to any subsequent modifications to the processes. How much revenue from the franchise contract will Entity A recognize in 20x1
On December 1, 20x1, CANOROUS Co. granted a 5-year franchise right to MELODIOUS, Inc. for an initial franchise
fee of ₱400,000 and a 10% sales-based royalty. The initial franchise fee is non-refundable and due upon signing of
the contract. At contract inception, CANOROUS determines that the nature of its promise to grant the license is to
provide the customer with the right to access CANOROUS’s intellectual property as it exist throughout the license
period. As of December 31, 20x1, CANOROUS has no remaining obligation or intent to refund any of the cash
received, all the initial services necessary to setup the contract have been performed, and MELODIOUS started
operating the franchised business. MELODIOUS reported sales of ₱800,000 for 20x1.
On December 31, 20x1, Entity A enters into a contract with Customer X to transfer a license for a fixed fee of
₱100,000 payable as follows:
20% is payable upon signing of contract.
80% is represented by a note receivable collectible in 4 equal annual installments starting December 31, 20x2.
The appropriate discount rate is 12%.
Case #2
The license provides Customer X the right to use Entity A’s patented processes. The agreement requires Customer
X to discontinue using its trade name and instead use Entity A’s trade name. Customer X is bound by the terms of
the contract to abide with Entity A’s policies on the use of the processes but is given the right to any subsequent
modifications to the processes. How much revenue from the franchise contract will Entity A recognize in 20x1?
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