Question

Telecom Co. enters into a​ two-year contract with a customer to provide wireless service​ (voice and​ data) for​ $40 per month. To induce​ customers, Telecom Co. provides a free phone. Telecom Co. normally sells the phone on a​ stand-alone basis for​ $200. Telecom Co. also charges the customer a​ one-time activation fee of​ $35. Which of the following is​ true?a. The free phone constitutes a marketing expense.
b. The activation fee is a separate performance obligation.
c. There are two distinct performance obligations: the wireless service and the phone.
d. There are two distinct performance obligations: the voice service and the data service.

Answer 1

Answer:

The answer is: C) There are two distinct performance obligations: the wireless service and the phone.

Explanation:

Performance obligation refers to a promise made by a company to deliver a good or service to a customer. A series of goods or services that are very similar and are transferred at the same time to a customer can be considered as one single performance obligation.

For example, the voice service and the data service are considered one single wireless service. But the cellphone is totally different so it has to be considered a separate performance obligation.