Question

Since 1970, Super Rise, Inc., has provided maintenance services for elevators. On January 1, 2018, Super Rise obtains a contract to maintain an elevator in a 90-story building in New York City for 10 months and receives a fixed payment of $96,000. The contract specifies that Super Rise will receive an additional $48,000 at the end of the 10 months if there is no unexpected delay, stoppage, or accident during the year. At the beginning of the contract, Super Rise estimates there is a 25% chance of earning the bonus. On June 30, 2018, Super Rise changes the estimate to reflect a 65% chance of earning the bonus. Super Rise prepares financial statements monthly.

If super Rise estimates variable consideration using the expected value approach, what amount of revenue related to the contract will be reported on 6/30/2018, and 7/31/2018?

6/30/2018	7/31/2018
a.	14,400	9,600
b.	22,320	12,720
c.	38,400	14,400
d.	24,000	12,000
e.	None of the above.

Answer 1

B is the correct answer (22,320 and 12,720)
Fixed Payment received	96,000
Per month revenue to be recognised (96k/10 months)	9,600
On 30/06/2018
Fixed Payment revenue	9,600
Bonus part revenue (18720 - 6000)	12,720
Revenue to be reported on 30/06/2018	22,320
Calculation of Bonus part revenue
Bonus part revenue to be recognised till 30/06/2018 as per 65% probability	=48000*65%/10*6
	18,720
Bonus part revenue already recognised till 31/05/2018 as per 25% probability	=48000*25%/10*5
	6,000
On 31/07/2018
Fixed Payment revenue	9,600
Bonus part revenue (=48000*65%/10)	3,120
Revenue to be reported on 31/07/2018	12,720