Question

On January 2, 2021, SMART, Inc. authorized Lima Company to operate as a franchisee for an initial franchise fee of P750,000. Of this amount, P300,000 was received as down payment upon signing the agreement, and the balance represented by a 12% note due in three annual payments, beginning December 31,2021, SMART rendered the required initial services at a cost of P150,000 and Lima was able to operate the franchise on April 27,2021. Assuming the collection of the note is not reasonably assured, the realized revenue from the initial franchise on December 31,2021 is: a. P360,000 b. P650,000 c. P300,000 d. P450,000

Answer 1

The realized revenue from the initial franchise on December 31, 2021, is P300,000.Thus the correct option is (c).

Step-by-step explanation:

SMART, Inc. authorized Lima Company to operate as a franchisee for an initial franchise fee of P750,000. Of this amount, P300,000 was received as a down payment, and the balance, represented by a 12% note, is due in three annual payments starting December 31, 2021. The down payment of P300,000 is recognized as revenue upon receipt. However, the note amount is not fully assured for collection, so it cannot be recognized as revenue until collection is reasonably assured.Thus the correct option is (c).

Additionally, SMART incurred costs of P150,000 to render the required initial services. The recognized revenue should be reduced by the cost incurred, resulting in the realized revenue. Therefore, the calculation is as follows:

`\[ \text{Realized Revenue} = \text{Down Payment} - \text{Cost of Initial Services} \]\[ \text{Realized Revenue} = P300,000 - P150,000 = P150,000 \]`

However, since the note collection is not reasonably assured, the entire amount is not considered as revenue. Hence, the realized revenue from the initial franchise on December 31, 2021, is P300,000.