Question

6/1/2019	Alby Corp. enters into a contract with a town to build a giant playground for $100,000.
	The town wants the playground to be done before school starts so provides a
	performance bonus of $15,000 if the playground is ready to use on September 1.
	The bonus is reduced by $5,000 each week the completion is delayed.
	Alby commonly includes these completion bonuses in its contracts, and, based on
	prior experience, estimates the following completion outcomes.
	Completed by	Probablilty
	1-Sep-19	60%
	9/8/2018	30%
	9/15/2018	10%
A	THE TRANSACTION PRICE FOR THIS CONTRACT IS____________________
B	Assume the same information as in part A except that Alby Corp. has never had any experience
	with completion bonuses in the past.
	THE TRANSACTION PRICE FOR THIS CONTRACT IS____________________

Answer 1

As per ASC606, revenue can be recognised for the variable amounts basis the below

1) if the company has experience with similar contracts and can reasonably estimate the cumulative amount and

2) there wont be significant reversal of revenues

For estimating, company can use probability weighted average or most likely outcome method.

A. Under this scenario, Alby corp estimate 3 dates of completion. It is understood to be probable equally. Hence the below shall be computation:

The contract price	100,000
Total Performance bonus on 1 Sept	15,000
Total	115,000

Note: $5,000 reduces from bonus weekly as per the contract.

Date of completion	Expected Amount	Probability Weight	Amount
1-Sep-19	115,000	33.33%	38,333
8-Sep-19	110,000	33.33%	36,667
15-Sep-19	105,000	33.33%	35,000
			110,000

Hence basis above the transaction price for the contract is $110,000

B. Alby Corp has no experience in similar type of contracts. Hence the conditions does not satisfy as per ASC 606. For this option the transaction price shall be $100,000 (no performance bonus is included)