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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 ago
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