Question

In: Accounting

Problem 5 Sage Corp. enters into a contract with a customer to build an apartment building...

Problem 5

Sage Corp. enters into a contract with a customer to build an apartment building for $1,069,900. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $153,300 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $51,100 each week that completion is delayed. Sage 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

6

After August 15, 2018

4


(a) Determine the transaction price for the contract, assuming Sage is only able to estimate whether the building can be completed by August 1, 2018, or not (Sage estimates that there is a 70% chance that the building will be completed by August 1, 2018).

Transaction price: $__________

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

Transaction price: $__________

Solutions

Expert Solution

Answer:
(a) Determintion of the transaction price if Sage estimates that there is a 70% chance that the building will be completed by August 1, 2018
            Transaction Price   =   Base price of the contract to build + performance Bonus
                                                  = $1,069,900    +   $153,300
                                                  =   $1,223,200
Note :
(Since it can only estimates 70% of chances of the completion by August 1 ,2018 and 70% chances of performance bonus by August 1,2018 and it is assumed that if it is completed 100% by August 1 ,2018 the entire performance bonus is applicable.
Transaction Price   = $1,223,200
(b) Determintion of the transaction price assuming Sage has limited information with which to develop a reliable estimate of completion by the August 1, 2018
                  Transaction Price   =   Base price of the contract to build
                                                        = $1,069,900
Note :
(Since there is limted information with which to develop a reliable estimate of completion by the August 1, 2018, we cannot assume if there is any probability of completion as per givenn date and we cannot assume whether performance bonus is applicable. So we can only consider the Base price of the contract without performance bonus.
Transaction Price   = $1,069,900

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

Waterway Corp. enters into a contract with a customer to build an apartment building for $1,069,900....
Waterway Corp. enters into a contract with a customer to build an apartment building for $1,069,900. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $153,300 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $51,100 each week that completion is delayed. Waterway commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion...
Cheyenne Corp. enters into a contract with a customer to build an apartment building for $995,600....
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...
Indigo Corp. enters into a contract with a customer to build an apartment building for $1,061,800....
Indigo Corp. enters into a contract with a customer to build an apartment building for $1,061,800. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $139,200 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $46,400 each week that completion is delayed. Indigo commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion...
Cullumber Construction enters into a contract with a customer to build a warehouse for $1070000 on...
Cullumber Construction enters into a contract with a customer to build a warehouse for $1070000 on March 30, 2021 with a performance bonus of $40000 if the building is completed by July 31, 2021. The bonus is reduced by $8000 each week that completion is delayed. Cullumber commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2021 70% August 7, 2021 20% August 14, 2021 5%...
Cullumber Construction enters into a contract with a customer to build a warehouse for $1070000 on...
Cullumber Construction enters into a contract with a customer to build a warehouse for $1070000 on March 30, 2021 with a performance bonus of $40000 if the building is completed by July 31, 2021. The bonus is reduced by $8000 each week that completion is delayed. Cullumber commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2021 70% August 7, 2021 20% August 14, 2021 5%...
On January 2, 2019, TI enters into a contract with Drewry Corp. to build a new...
On January 2, 2019, TI enters into a contract with Drewry Corp. to build a new piece of equipment. The contract price is $3,200,000, and construction is expected to take 18 months. Drewry is billed and pays $1,600,000 of the contract price on January 2, 2019, and will pay the balance at completion. TI estimates that the cost of construction will be $2,300,000. Drewry includes two performance bonuses in the contact: • U.S. Bonus: If the equipment design receives a...
The Young Company enters into a long-term project to build a new office building. The Contract...
The Young Company enters into a long-term project to build a new office building. The Contract price is $9,000,000 and Young expects to complete the project in three years. Young gives you the following information for the first two years regarding the project: 2017 2018 Actual costs incurred during year 2,400,000 3,800,000 Estimated costs to complete at as of December 31: 5,100,000 3,000,000 Amounts billed to customer 2,800,000 4,100,000 Collections from customer 2,600,000 3,400,000 Required: 1.    Prepare the journal entries...
6/1/2019 Alby Corp. enters into a contract with a town to build a giant playground for...
6/1/2019 Alby Corp. enters into a contract with a town to build a giant playground for $100,000. The town wants the playground to be done before school starts so provides a performance bonus of $15,000 if the playground is ready to use on September 1. The bonus is reduced by $5,000 each week the completion is delayed. Alby commonly includes these completion bonuses in its contracts, and, based on prior experience, estimates the following completion outcomes. Completed by Probablilty 1-Sep-19...
Problem 3 An entity entered into a construction contract to build a condo building at a...
Problem 3 An entity entered into a construction contract to build a condo building at a fixed price of $54,000,000. Construction started in 20x0 and ended in 20x3. Data on the contract is as follows (in ‘000’s): 20x0 20x1 20x2 20x3 Costs incurred during the year $ 6500 19500 25000 5800 Estimated costs to complete 38500 26000 6500 - Billings 18000 18000 - 18000 For each of the parts below, prepare the ‘mini’ income statement for the project for each...
a) A telecommunications company enters into a contract with a customer. Under the contract, the company...
a) A telecommunications company enters into a contract with a customer. Under the contract, the company promises to provide to the customer 4 GB data, 300 minutes of talk time, and 500 texts for $36. Required: Briefly explain how the telecommunications company should account for the contract under NZ IFRS 15. You need to refer to the relevant requirements but not to any specific paragraph of NZ IFRS 15.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT