Question

Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that it will receive a flat fee of $51,000 and an additional $21,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 25% chance that Bran will achieve the cost-savings target. Required: 1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the transaction price. 2. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the transaction price. 3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain of that estimate due to a lack of experience with similar consulting arrangements. Calculate the transaction price.

Answer 1

1.)	S.No.	Possible Amount $	Probabilities	Expected amount $ (Possible amount x Probablity )
	1	72,000	25%	18,000
		(51,000 + 21,000 )
	2	51,000	75%	38,250
		Transaction price		56,250
2.)	Most Likely
	Particulars	Amount in $
	Flat Fee	51,000
	Add: Additional fee*	0
	Transaction price	51,000

* Note- 25% probability of achieving the cost saving target can not be considered as most likely amount because for most likely it has to be more than 50%. Hence, Additional fee will be ignored under most likely method.

3.)	Particulars	Amount in $
	Flat Fee	51,000
	Add: Additional fee**	0
	Transaction price	51,000

**Additional fee will be ignored as there is uncertainty involved in calculation of estimated value of variable consideration due to lack of experience.