Question

Cheyenne Corp. enters into a contract with a customer to build an apartment building for $995,600. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $145,500 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $48,500 each week that completion is delayed. Cheyenne commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by		Probability
August 1, 2018		70	%
August 8, 2018		20
August 15, 2018		5
After August 15, 2018		5

(a) Determine the transaction price for the contract, assuming Cheyenne is only able to estimate whether the building can be completed by August 1, 2018, or not (Cheyenne estimates that there is a 70% chance that the building will be completed by August 1, 2018). (If answer is 0, please enter 0. Do not leave any fields blank.)

Transaction Price

$

(b) Determine the transaction price for the contract, assuming Cheyenne has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.

Transaction Price

$

Answer 1

Answer (a)

In this case, Cheyenne Corp. uses the most likely amount as the estimate of completion, it will be completed by August 1, 2018.

Transaction Price =          Contract Price + Performance Bonus

                                   =          995,600 + 145,500

                                   =          $1,141,100

Answer (b)

In this case, No revenue to be recorded in relation to the scheme of Incentive unless the uncertainty is resolved. Here, no revenue for the contract will be recognized until the completion of the contract provided by the customer.

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