In: Accounting
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.
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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.
|
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 |