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. The extended warranty sells for the same amount regardless of whether it is purchased at the same time as the Tornado or at some other time. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner?

Answer 1

Answer:

1. The obligation to transfer the vacuum cleaner in lieu of the price.

2. To honour one year warranty for any product defect that is part of the purchase contract and an inherent obligation.

Explanation:

The contract for purchase of a vacuum cleaner has two performance obligations;

1. The obligation to transfer the vacuum cleaner in lieu of the price.

2. To honour one year warranty for any product defect that is part of the purchase contract and an inherent obligation.

it may be noted that the extended warranty is a separate performance obligation as it can be purchased at the same time of original purchase or later and separate consideration is payable for that and there is no direct co-relation of the extended warranty obligation with the initial purchase.