Dwaynes Auto Repair Inc. (Dwaynes Auto Repair) is a national franchisor that provides auto repair services and owns the franchise rights to the Dwaynes Auto Repair Inc. franchise. The controller, Diana, has been asked by the chief financial officer (CFO) to determine the required accounting treatment for the following transaction for the year ended December 31, 2021.

On January 1, 2021, Dwaynes 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 an initial 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. The contract 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 Dwaynes Auto Repair to 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, payable monthly by John to Dwaynes 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 Dwaynes Auto Repair 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 these costs to the franchisee. Dwaynes Auto Repair has determined that the credit risk rate associated with John is 9%.

Required:

Prepare the notes for a meeting with the CFO to explain how Dwaynes Auto Repair should account for this transaction under IFRS 15 Revenue from Contracts with Customers. 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 Dwaynes Auto Repair needs to record for the 2021 fiscal year.