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 2 years agoRelated Solutions
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