Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction...

Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction of 10 yachts for a total price of $10,000,000. The customer needs the boats in its showrooms by March 1, 2018, for the yacht purchase season; the customer will provide a bonus payment of $100,000 if all yachts are delivered by the March 1 deadline. The bonus is reduced by $25,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after March 22, 2018. Felix frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome.

A. How should Felix determine the transaction price under FASB ASC 606 for this contract?

B. Assume that Felix has limited experience with a construction project on the same scale as the 10 yachts. How should Felix determine the transaction price for this contract?

Expert Solution

As per FASB ASC 606-Revenue from Contract with Customers, "An entity should recongnize revenue to depict the transfer to goods and services to customer that reflects the consideration in which the Entity EXpects to Entitled in Exchange of Goods or Services".

In the Present case of Flexicrop while Estimating the Transaction value which on has to Book in case of delivery of ships, Transaction value will includes amount of Consideration a entity will expects to include while performing the contract.

In First case, as Felix is Experienced in Making of Boats and with the Historical Data of Estimation the Probability of Completion of Contract within dates to accumulate Bonus is 25%, so in this case along with the Contract Value of $10,000,000 he should also book Bonus to the Extent of 25% which is $25000(100000*25%).

In the Second case, As Flexi has limited experince the probability of gaining Bonus is minimum and supports no any historical data, so in this case only the Contract Money of $10,000,000 will be recongnized

ekkarill92 answered 2 years ago

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