Question

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 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.

Answer 1

1.

Calculate the transaction price as shown below:

A	B	C
Possible Amounts	Probabilities	Expected Amounts
A	B	(A × B)
$70,000	0.2	$14,000
$50,000	0.8	$40,000
Expected transaction price		$54,000

 

Transaction price is $54,000.

Explanation:

As the business uses the expected value as its estimate of variable consideration and there is 20% chance that B will achieve the cost-saving target, so there are 20% chances that B will achieve 70,000 cost saving and 80% chances that B will be able to achieve only 50,000 cost saving. The sum of expected transaction price under each scenario forms to be the total expected transaction price.

 

2.

Using the most likely value as its estimate of variable consideration, calculate the transaction price as shown below:

Particulars	Amounts($)
Flat Fee	50,000
Add: Additional Fee	0
Total	50,000

Transaction price is $50,000.

Explanation:

In this case the business uses the most likely value as its estimate of variable consideration. Most likely situation is considered in the case when the chances of occurring an event is more than 50%.

In the given problem, it is stated that there is 20% chance of achieving the cost savings targets. 20% does not quality as most likely situation, as this means that there are 80% chances that cost saving targets are not achieved. Therefore, addition fee is not considered.

 

3.

Calculate the transaction price as shown below:

Particulars	Amounts($)
Flat Fee	50,000
Add: Additional Fee	0
Total	50,000

 

Transaction fee is $50,000.

Explanation:

There is an uncertainty involved in the calculation of estimated value of variable consideration due to lack of experience. Thus, the inclusion of estimated variable consideration is not justified. It would be justified only to include the fixed flat fee of $50,000. Thus, the transaction price in this case will not include variable amount of consideration.

 

Therefore, the transaction price will be flat fee of $50,000.

Therefore, the transaction price will be flat fee of $50,000.