QUESTION TWO [36] Cold Front Limited ("Cold Front") sells air conditioning units to customers all over South Africa. Cold Front 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. 41 VODONTO AVRUSUAINDROPOMENALENDARIO You are requested to address the following issue in relation to Cold Front for the current financial year ending 31 December 2018: Contract with customer Cold Front recently secured a non-cancellable contract with XYZ Limited ("XYZ") to supply, install and maintain 50 air conditioning units at a price of R10 500 each. The two-year contract was signed on 1 April 2018 by both parties. The following information relates to the units included in the contract: Air conditioning unit: The units were sourced by Cold Front from their supplier at a cost of R5 000 each. These units can be sold individually for R7 000 each by a cost of R5 000 each. These units can be sold individually for R7 000 each by Cold Front Installation: Fitment of air conditioning units costs Cold Front R800 per unit. A mark-up on installation cost of 50% is applied by Cold Front. The installation of all 60 air conditioning units for XYZ will be carried out on 30 April 2018. 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. Cold Front 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 R10 500 per unit is required to be made by the customer in full by 31 December 2018. The financing component on this contract is considered insignificant. Required a) Write a letter to the financial director of Cold Front Limited, discussing how the contract with XYZ Limited should be treated in the annual financial statements of Cold Front Limited in terms of International Financial Reporting Standards. Your answer must be limited to recognition and measurement issues only (ie. Ignore presentation and disclosure). Show workings where applicable. (28) b) Prepare the journal entries in the accounting records of Cold Front Limited to record the contract with XYZ Limited for the year ended 31 December