Reference no: EM133004364

If you had the opportunity to choose between using GAAP and IFRS, purely for long-term receivables, which would you choose? Why?

Dwayne's Auto Repair Inc. (Dwayne's Auto Repair) is a national franchisor that provides auto repair services and owns the franchise rights to the Dwayne's Auto Repair Inc. franchise. The controller, Diana, has been asked by the chief financial officer (CFO) todetermine the required accounting treatment for the following transaction for the year ended December 31, 2021.On January 1, 2021, Dwayne's Auto Repair sold the rights to open a new franchise to John. The franchise agreement is for five years. The contract requires John to pay aninitial upfront fee of $350,000 on January 1, 2021, with a semi-annual payment of $50,000 due on June 30 and December 31 of each year from 2021 to 2025. Thecontract outlines that the initial fee and the 10 payments of $50,000 cover the startup repair equipment (delivered February 1, 2021) and a service by Dwayne's Auto Repairto continually develop new products and services and provide any support required by the franchisee. There is also a fee that equals 5% of gross franchisee sales, payablemonthly by John to Dwayne's Auto Repair, to cover marketing and advertising costs for the franchise.The stand-alone price for the equipment is $525,000. There is no stand-alone price for the continuing product development services and ongoing support, but Dwayne's AutoRepair has estimated that it costs approximately $45,000 per year per franchised outlet to provide these services, and the company normally charges a 30% markup on thesecosts to the franchisee.

Dwayne's Auto Repair has determined that the credit risk rate associated with John is9%.

Required:

Problem 1: Prepare the notes for a meeting with the CFO to explain how Dwayne's Auto Repair should account for this transaction under IFRS 15 Revenue from Contracts withCustomers. Use the five steps of revenue recognition from IFRS 15 to help construct the analysis on how to account for this transaction. As part of the analysis, prepare the journal entries Dwayne's Auto Repair needs to record for the 2021 fiscal year.