Question 3 (20 marks)

Computers Inc. sells personal computers as well as home Internet service. On July 1, 2018, Computers sold a computer with a two-year Internet connection service contract and a two-year extended warranty on the computer. The customer paid $2,000 cash for this special offer. Each component could have been purchased separately by the customer so three performance obligations have been identified.

The stand-alone selling price of the computer is $1000 (cost to Computers Inc. $580). The stand-alone value of the two -year Internet service is $1,400 and the extended warranty is $100 (if purchased and paid for today).

Assume the costs to provide the Internet and extended warranty are incurred fairly evenly throughout the three-year period. The customer takes the computer home on July 1, 2018.

Computers Inc. has a December 31 year end and prepares financial statements annually.

Required:

1. How much of the $2000 revenue will be recorded in each year (2018 through to 2020)? Show all calculations and label all amounts.

(b) Prepare all of the journal entries to record the above transaction for 2018 and 2019.