On July 15, 2018, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $90,000. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $60,000 for the scales, $10,000 for the software, and $30,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2018, and the calibration service commenced on that date. How many performance obligations exist in this contract?
A) 0
B) 1
C) 2
D) 3

Question

Quizplus · Accepted Answer

Goods or services must be distinct to qualify as performance obligations. To be distinct, goods or services must be both capable of being distinct and separately identifiable. The scales and software appear capable of being distinct, as they could be sold separately, but they are not separately identifiable, as they are integrated with each other and not useable without each other. The one-year calibration contract is capable of being distinct and separately identifiable, as other vendors could provide similar services. Therefore, the contract has two performance obligations: the combination of the scales and software, and the calibration contract.