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 $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 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

Solution 1:

Computation of Transaction Price
Possible Amount	Probability	Expected Amount
$66,000.00	75%	$49,500.00
$102,000.00	25%	$25,500.00
Expected Transaction price		$75,000.00

Solution 2:

Transaction price using most likely approach = $66,000

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 25% chance of achieving the cost savings targets. 25% does not quality as most likely situation, as this means that there are 75% chances that cost saving targets are not achieved. Therefore, additional fee is not considered.

Solution 3:

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.

Therefore, the transaction price will be flat fee of $66,000.