IGNORE VAT AND ANY TAX RELATED MATTERS

Winnie Limited is a company servicing the IT sector. Specifically, they install and maintain computer networks. Winnie Limited has a December year end.

On $1$ January $2019,$ Winnie Limited won a tender to install and maintain the nation$-$wide network of Emily $($Pty$)$ Ltd$,$ a company specializing in teaching accountancy.

Contract details with the customer:

The tender was to install a fully functional network consisting of $500$ new desktop computers connected to $1$ main server and then maintain the network for free over a period of $3$ years from the installation date. The contract price amounted to R$5000000$ at contract inception payable in two instalments, $30\%$ deposit at the inception of the contract and the balance when the network has been installed.

To encourage early payment, a $15\%$ discount would be provided if payment was received within $30$ days after the network installation was completed. It was anticipated that the payment would be received within the required period as to qualify for the early settlement discount. The retail price of each computer is R$7500$ and the retail price of the server is R$100000.$ The installation was completed on $1$ March $2019.$

The retail price for a similar $3$ year maintenance plan that can be provided by any other qualified computer service company is R$150000.$ The maintenance work related to the network is considered to be performed evenly over the $3$ year period, starting immediately after the network installation is completed.

The deposit was paid as per the contract and the balance was paid on $15$ March $2019.$

Any financing components are considered to be insignificant.

YOU ARE REQUIRED TO:

Calculate the transaction price at inception of the contract.

$(1$ Mark$)$

Discuss fully if the installation of the computer network is a separate performance obligation from the maintenance plan in the contract between Winnie Ltd and Emily $($Pty$)$ Ltd$.$

$(12$ Marks$)$

Assuming that you have two performance obligations, $(1)$ the installation of the network and $(2)$ the maintenance plan, briefly discuss how to allocate the transaction price to the separate performance obligations and perform the required calculation.

$(4$ Marks$)$

Prepare the general journal entries to recognise the cash flows and the revenue related to the computer network only for the financial year ended $31$ December $2019.$ Ignore narrations only.

$(8$ Marks$)$