Question

In: Accounting

Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that...

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 $53,000 and an additional $23,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% 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.

requirement 1

Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the transaction price.

Possible Amounts Probabilities Expected Amounts
× % =
× % =
Expected contract price at inception
  • Req 2 and 3

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.

2. Transaction price
3. Transaction price

Solutions

Expert Solution

1)
possible amounts probabilities = expected amounts
$ 76,000 * 20%                    = $ 15,200
$ 53,000 * 80 %                   = $ 42,400
                               expected contract price at inception $ 57,600
explanation :
possible amounts probabilities = expected amounts
$76,000 ($53,000 fixed fee+ $ 23,000 bonus) * 20% $ 15,200 {$76,000 *20% }
$ 53,000 ($53,000 fixed fee+ 0 bonus ) * 80% $ 42,400 { $53,000 *80% }
                                    expected contract price at inception $ 57,600
alternatively ,
$ 53,000 + ( $ 23,000 * 20% ) = $ 57,600
2) transaction price = $ 53,000
explanation :
the most likely amount is the flat fee of $ 53,000 because there is higher chance of not
qualifying for the bonus than of qualifying for the bonus
so, $ 53,000 is the transaction price.
3) transaction price = $ 53,000
explanation :
transaction price is $ 53,000 because Thomas is very uncertain of its estimate , Thomas
can't argue that it is probable that it is possible that it won't have to reverse
( adjust downward) a significant amount of revenue in the future because of a change
in returns. Therefore , Thomas would not include the bonus estimate in transaction
price. So, the transaction price will be flat fee of $ 53,000

Related Solutions

Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that...
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...
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that...
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 $58,000 and an additional $28,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 35% 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...
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that...
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 $66,000 and an additional $36,000 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...
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that...
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 $57,000 and an additional $27,000 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...
Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives
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 $50,000 and an additional $20,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% 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...
Murkey Consultants provided Lamba Construction with assistance in implementing various cost-savings initiatives. Murkey’s contract specifies that...
Murkey Consultants provided Lamba Construction with assistance in implementing various cost-savings initiatives. Murkey’s contract specifies that it will receive a flat fee of $100,000 and an additional $40,000 if Lamba reaches a prespecified target amount of cost savings. Murkey estimates that there is a 20% chance that Lamba will achieve the cost-savings target. Required: Assuming Murkey uses the expected value as its estimate of variable consideration, calculate the transaction price. Assuming Murkey uses the most likely value as its estimate...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT