Stepless Limited sells electronic stairlifts to customers

Stepless Limited sells electronic stairlifts to customers in South Africa. The also complete installation of the units and provide maintenance. Stepless Limited also provide installation and maintenance services to other customers even if they purchased their units elsewhere.

Stepless Limited secured a non-cancellable contract with RetireWithUs (Pty) Ltd for their new duplex homes that they have just built on an estate. Unfortunately, not all the homes could be built as stepless therefore the need for the stairlifts in 20 of the units. The contract is to supply, install and maintain 20 stairlift units at a price of R32 000 each. The two year contract was signed on the 1 April 2020 by both parties. The following information relates to the units included in the contract:

– Stairlift units: the units were sourced by Stepless Limited from their supplier at a cost of R20 000 each. These stairlift units can be sold individually for R28 000 each by Stepless Limited.

– Installation and fitment of these stairlifts costs R2 500 per unit as it requires time and skill to install. A mark-up on installation cost of 50% is applied by Stepless Limited. The installation of all 20 units will be carried out on the 30 April 2020.

– Maintenance of the units is required to be undertaken annually on the 31st of December each year. The contract provides for a two-year maintenance plan. Stepless Limited offers maintenance to customers who purchased their units from other entities at a cost of R2 000 per unit per service.

– Payment of the full purchase price of R32 000 per unit is required to be made by the customer in full by 31st December 2020.

– The financing component on this contract is considered to be insignificant.

Mr Not Sure has recently been appointed as the CEO of Stepless Limited. Unfortunately, Mr Not Sure has limited accounting knowledge and is not sure how this contract should be accounted for in the books.

REQUIRED:

Prepare a memorandum to Mr Not Sure discussing how the above contract should be treated in the annual financial statements of Stepless Limited for the year ended 31 December 2020. Your memo should be limited to recognition and measurement issues only and must include the journal entries required to record the contract in the books. (Your answer must be in terms of International Financial Reporting Standards. Narrations are not required for journal entries. Ignore presentation and disclosure).