Question

1.Strong, Inc., bundles two kinds of service activities into a single $6,000 fixed-price contract, yielding two distinct performance obligations, A and B. Each activity has a stand-alone selling price of $3,200. Obligation A is satisfied immediately upon contract signing. Obligation B is satisfied evenly over an eight-month period. The transaction price is:

a. $3,200. b. $6,400. c. $3,000. d. $6,000.

2.Strong, Inc., bundles two kinds of service activities into a single $6,000 fixed-price contract, yielding two distinct performance obligations, A and B. Each activity has a stand-alone selling price of $3,200. Obligation A is satisfied immediately upon contract signing. Obligation B is satisfied evenly over an eight-month period. After the date of contract signing and the satisfaction of obligation A, two months have passed. Cumulatively, how much revenue should Strong, Inc., recognize by the end of the second month?

a. $4,000

b. $3,000

c. $3,750

d. $3,200 3.Strong, Inc., bundles two kinds of service activities into a single $6,000 fixed-price contract, yielding two distinct performance obligations, A and B. Each activity has a stand-alone selling price of $3,200. Obligation A is satisfied immediately upon contract signing. Obligation B is satisfied evenly over an eight-month period. After the date of contract signing and the satisfaction of obligation A, two months have passed. Assuming the contract price is paid up front, how much liability should Strong, Inc., recognize at the end of the second month? a. $2,250 b. $2,800 c. $2,000 d. $0

4.Janus Construction signs a contract to construct a small warehouse. The amount Janus will be paid depends on when the warehouse will be finished and is totally dependent on management's efficiency in production planning. The contract price is $100,000. Each one-week delay results in a penalty equal to $2,000. Janus's management, well versed in scheduling this kind of job, estimates the following distribution of outcomes and associated probabilities:

On-time completion: 30% chance

One-week delay: 50% chance

Two-week delay: 10% chance

Three-week delay: 10% chance

Under the expected-value approach, the transaction price is:

a. $100,000.

b. $94,000.

c. $98,000.

d. $96,000. 5. Janus Construction signs a contract to construct a small warehouse. The amount Janus will be paid depends on when the warehouse will be finished and is totally dependent on management's efficiency in production planning. The contract price is $100,000. Each one-week delay results in a penalty equal to $2,000. Janus's management, well-versed in scheduling this kind of job, estimates the following distribution of outcomes and associated probabilities: On-time completion: 30% chance One-week delay: 50% chance Two-week delay: 10% chance Three-week delay: 10% chance Under the most likely amount approach, the transaction price is: a. $96,000. b. $98,000. c. $94,000. d. $100,000.

Answer 1

1.. ANSWER: d. 6000 --Fixed-price contract

Transaction price is the amount of consideration the entity expects to be entitled to, in exchange for performing the promised services.

2..ANSWER: c.. 3750 (Revenue to be recognised at the end of 2nd month )

(6000/6400*3200)+(6000/6400*3200*2 mths./8 mths.)=

3750

3..Answer: a. $ 2250 (Assuming,Contract price is paid up front, liability should Strong, Inc., recognize at the end of the second month is ----Total Transaction Price-Revenue recognised till end of 2nd month)

6000-3750=

2250

4. ANSWER: c. $ 98000

Under the expected-value approach, the transaction price is the sum of the probability -weighted outcomes of the transaction prices .

ie. (100000*30%)+((100000-2000)*50%)+((100000-4000)*10%)+((100000-6000)*10%)=

98000

5.ANSWER: b. 98000

Under the most likely amount approach, the transaction price is the single most likely contract outcome,ie. The transaction price associated with 50% (the highest) chance

98000