On 1 January 2022, Conoco Limited entered into a four-year fixed-price contract to maintain the delivery...

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On 1 January 2022, Conoco Limited entered into a four-year fixed-price contract to maintain the delivery vehicles of Phillips (Pty) Ltd, a East London based trucking company. Conoco Ltd undertakes maintenance work on the commercial vehicles of various businesses throughout the country. The fixed price contract requires Conoco Limited to maintain, and meet all the costs of maintaining Philips (Pty) Ltd's delivery vehicles over thes four-year contract period. Philips (Pty) Ltd replaced all of its delivery vehicles on 1 January 2022, and depreciates these vehicles on the straight-line method over four years to a residual value that is computed at 15% of original cost. Conoco Limited realistically expects the costs of fulfilling the maintenance contract to be significantly higher as the vehicles get older. The fixed contract price is R5 000 000, and is payable in equal monthly arrear instalments (i.e. R1 250 000 per annum). Conoco Limited expects to make a total profit of R1 000 000 over the entire four-year contract. Up until 31 December 2022, Conoco Limited had incurred costs of R500 000 in fulfilling its obligations in accordance with the maintenance contract. REQUIRED: Describe how Conoco Limited should account for the maintenance contract for the trucking vehicles, both in general terms, and during the 2022 year in particular. Your answer must be limited to the recognition and measurement issues only (i.e. complete the 5 step process and ignore presentation and disclosure). On 1 January 2022, Conoco Limited entered into a four-year fixed-price contract to maintain the delivery vehicles of Phillips (Pty) Ltd, a East London based trucking company. Conoco Ltd undertakes maintenance work on the commercial vehicles of various businesses throughout the country. The fixed price contract requires Conoco Limited to maintain, and meet all the costs of maintaining Philips (Pty) Ltd's delivery vehicles over thes four-year contract period. Philips (Pty) Ltd replaced all of its delivery vehicles on 1 January 2022, and depreciates these vehicles on the straight-line method over four years to a residual value that is computed at 15% of original cost. Conoco Limited realistically expects the costs of fulfilling the maintenance contract to be significantly higher as the vehicles get older. The fixed contract price is R5 000 000, and is payable in equal monthly arrear instalments (i.e. R1 250 000 per annum). Conoco Limited expects to make a total profit of R1 000 000 over the entire four-year contract. Up until 31 December 2022, Conoco Limited had incurred costs of R500 000 in fulfilling its obligations in accordance with the maintenance contract. REQUIRED: Describe how Conoco Limited should account for the maintenance contract for the trucking vehicles, both in general terms, and during the 2022 year in particular. Your answer must be limited to the recognition and measurement issues only (i.e. complete the 5 step process and ignore presentation and disclosure).

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