Problem
Byte Right is a wholesale supplier of computer hard drives. Byte Right sold some hard drives to the American branch if an international, blue-chip company called Terra One.
Byte Right and Terra One are long standing business partners and for that reason should Terra One require hard drives, they are produced exclusively for Byte Right.
Byte Right and Terra One entered the following agreement:
- Contract date: 22 December 2020
- Contract price: R2 000 000
- Contract obligations:
Supply of hard drives
Installation of the hard drives at the American branch of Terra One and
Providing maintenance services for three years whereby Byte Right will be expected to provide backup whenever needed.
The three-year maintenance programme is very popular with all Byte Right customers.
The stand-alone prices of the various contract components were as follows: the hard drives are R320 000, the installation process is R840 000 and the 3 year maintenance is R1 320 000.
Delivery and installation information:
- The American branch took delivery of the hard drives on the 28th of December 2020 but were unable to use them until the installation team arrived at their offices to install them.
- The installation team arrived and completed the installation on 9th of January 2021.10.05
The contract price of R2 000 000 was payable by Terra One in instalments as follows:
- Half the total contract price is due in 2 equal instalments:
On the 31st of December 2021
On the 31st of December 2022
- Byte Right offers the option to pay in instalments to all of its customers
The contract does not contain a significant financing option.
Task
A. Identify the performance obligations and provide reasons to support your answer.
B. Determine the transaction price with reasons.
C. Determine the allocation of the transaction price.
D. Show the journal entries that will be required to be processed for the years ended 31 December 2020 and 31 December 2021.