Question 2 [45] Fresh Air sells airconditioning units to customers all over South Africa. Fresh Air also provides installation of air conditioning units that customers have purchased elsewhere. The company also provides maintenance services of air conditioning units to customers whose units have been installed by other suppliers. You are requested to address the following issue in relation to Fresh Air for the current financial year ending 31 December 2020: Contract with customer Fresh Air recently secured a non-cancellable contract with Rainbow Limited to supply, install and maintain 55 air conditioning units at a price of R12 500 each. The two-year contract was signed on 1 April 2020 by both parties. The following information relates to the units included in the contract: Air conditioning unit: The units were sourced by Fresh Air from their supplier at a cost of R7 000 each. These units can be sold individually for R9 000 each by Fresh Air. Installation: Fitment of air conditioning units costs Fresh Air R500 per unit. A mark-up on installation cost of 50% is applied by Fresh Air. The installation of all 55 air conditioning units for Rainbow Limited will be carried out on 30 April 2020. Maintenance: Air conditioning units are required to be serviced on an annual basis on 31 December. The contract provides for a two-year maintenance plan. Fresh Air offers maintenance to customers who have purchased air conditioning units from other entities at a cost of R1 000 per unit per service. Payment of the full purchase price of R12 500 per unit is required to be made by the customer in full by 31 December 2020. The financing component on this contract is considered insignificant.

Required a) Discuss how the contract with Rainbow Limited should be treated in the annual financial statements of Fresh Air Limited in terms of International Financial Reporting Standards. Your answer must be limited to recognition and measurement issues only

b) Prepare the journal entries in the accounting records of Fresh Air Limited to record the contract with Rainbow Limited for the year ended 31 December 2020