Question

Kinnamont Company manufactures farming equipment that includes navigational systems as part of the standard equipment package and offers optional training on any navigational systems for an additional fee. Smith Company enters into a contract with Kinnamont that includes a combine, a navigational system, and training. Identify the performance obligations to which Smith should allocate the transaction price:A. The combine, the navigational system, and the training as three separate performance obligations.
B. The combine including the navigational system and the training as two separate performance obligations.
C. The combine, the navigational system, and the training account for one performance obligation because they are all part of the same contract.
D. No performance obligations exist because the work on the contract, including the training, has not begun.

Answer 1

Answer: Option B

Explanation:

The contract between Kinnamont and Smith covers two obligations that needs to be performed one is to provide a navigational system and other is training. Both the obligations needs to be provided together as a combine. The accounting for the contract which has multiple performance obligations should allocate transaction pricing separately for each obligation that needs to be performed.

So the transaction pricing in this scenario has to be allocated for navigational system and training separately. The price is not split between the obligations but the price has to be measured based on the work done.