Reference no: EM132823147

Question - Double Stack Burgers Inc. (DSB) is a national franchise that offers a proven fast food system in its Double Stack restaurants, which sell multi-patty burgers along with french fries and shakes. DSB has recently negotiated a new franchise agreement with Jayne Jacks. As Jayne is a popular TV personality, some terms in the agreement were granted to her that differed considerably from DSB's standard franchise agreement. DSB is unsure about how to account for the agreement with Jayne.

The five-year agreement with Jayne was made on January 1, 2020. The agreement calls for an initial fee of $750,000 due on the date of the agreement and annual payments of $100,000 due on December 31 of each of the five years. The agreement states that the initial payment and subsequent annual fee cover the franchise startup equipment as well as ongoing franchise system support and brand awareness advertising to be carried out by DSB.

The startup equipment has a stand-alone price of $675,000, and other franchisees are charged annual fees of $150,000 to cover franchise support and brand awareness advertising. The equipment was delivered on January 20, 2020. DSB has determined that the annual return required for customers with a credit risk similar to Jayne's is 8%. DSB has a December 31 year end and follows IFRS.

Required -

a) Identify the performance obligations in Jayne's franchise agreement, and explain whether each is a distinct performance obligation.

b) Prepare the journal entries that DSB should record for all the transactions pertaining to Jayne's agreement during 2020.