AutoFix Solutions Inc. (AutoFix Solutions) is a national franchisor providing automotive repair and maintenance services. It reports under IFRS.
AutoFix Solutions owns the franchise rights to the AutoFix brand and operates franchises across the country. The company’s controller, Amy, has been asked by the chief financial officer (CFO) to determine the appropriate accounting treatment for a recent franchise sale for the year ended December 31, 2024 (see Appendix III).
As Amy is currently very busy with other matters, she has asked you to help prepare notes for a meeting with the CFO to explain how AutoFix Solutions should account for this transaction. As part of the analysis, prepare the journal entries that would be recorded for the 2024 fiscal year.
Appendix III
On January 1, 2024, AutoFix Solutions sold the rights to open a new franchise to Sarah. The franchise agreement is for six years. The contract requires Sarah to pay an initial upfront fee of $300,000 on January 1, 2024, with a quarterly payment of $40,000 due on March 31, June 30, September 30, and December 31 of each year from 2024 to 2029.
The contract specifies that the initial fee and the 24 quarterly payments of $40,000 cover the startup repair equipment (delivered February 15, 2024) and AutoFix Solutions' services, which include product development and ongoing franchisee support.
Additionally, there is a recurring fee equal to 6% of Sarah’s gross franchise sales, payable monthly, to cover marketing and advertising expenses for the franchise.
The stand-alone price for the equipment is $480,000. While there is no separate pricing for product development and ongoing support services, AutoFix Solutions estimates the cost at $50,000 per year per franchise location, with a typical markup of 25% charged to franchisees.
AutoFix Solutions has determined that the credit risk rate associated with Sarah is 8%.
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