Question

Vroom Vacuums sells the Tornado vacuum cleaner. Each Tornado has a one-year warranty that covers any product defects. When customers purchase a Tornado, they also have the option to purchase an extended three-year warranty that covers any breakage or maintenance. Customers pay 20% less for the extended warranty if they buy it at the same time they buy a Tornado. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner

Answer 1

Answer:

Performance obligation:

Revenue is recognized by a company if the contractual obligations are satisfied by transferring the goods and services to a customer. A performance obligation must be identified and separated.

The purchase of vacuum cleaner contract gives raise to only one implied performance obligation. The warranty given is not a performance obligation but a quality assurance. And the warranty cost does not satisfy the contractual obligation of sale.

The one-year warranty is given only on the purchase of the vacuum cleaner. This warranty cannot be sold separately.

Therefore. V should recognize this cost as a warranty expense in the period of sale.

The extended warranty for a period of three years is sold separately. This is a separate performance obligation since the warranty for quality assurance is extended beyond the original period of one year.

This warranty can be purchased by customers separately which is priced separately from the product. This extended period warranty is not included in the implied contract.

Therefore, there exists only one performance obligation in the contract.