WileyPLUS: MywileyPLUST Help 1 Contact.us I Leg Kieso, Intermediate Accounting,
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WileyPLUS: MywileyPLUST Help 1 Contact.us I Leg Kieso, Intermediate Accounting, 16e INTERMEDIATE ACCOUNTING (ACCT 201-20 ctice Assignment Gradebook ORION Downloadable eTextbook ment CALCULATOR | | MESSAGE HY INSTRUCTOR LL SCREEN PR?NTTR VERSION NEXT Exercise 18-5 leff Heun, president of Bonita Always, agrees to construct a concrete cart path at Dakota Golf Club, Bonita Always enters into a contract with Dakota to construct the path for $191,000. In addition, as part of the contract, a performance bonus of $48,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $12,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs, that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late. Determine the transaction price that Bonita Always should compute for this agreement Transaction Price Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week, late, determine the transaction price Transaction price Click if you would like to Show Work for this questions Qen Show Work you wotu Question Attempts:0 o' 4 used SAVE rOR·ATI R SUBNIT ? Nl.ro3. P3 duExplanation / Answer
Ans:
Jeff estimated transaction price should be calculated as follows:
Since Jeff is not sure about the completion of contract on time, bonus part of the contract shoulb be calculated based on probability of completion of contract.
Performance Bonus Calculation
Completion of Contract
Probability
Bonus
Estimated Bonus
On time
0.55
48000
26400
1 Week Late
0.3
36000
10800
2 Weeks Late
0.15
24000
3600
Total Estimated Bonus
40800
So Transaction price that Bonita always should compute for this agreement is $191,000+40,800 = $231,800
b.) IF after reviewing, Jeff believes that probability of completion of project on time is 90%, then Estimated transaction price will be:
Performance Bonus Calculation
Completion of Contract
Probability
Bonus
Estimated Bonus
On time
0.9
48000
43200
1 Week Late
0.1
36000
3600
Total Estimated Bonus
46800
So Estimated transaction price will be $191,000+46,800 = $237,800
Performance Bonus Calculation
Completion of Contract
Probability
Bonus
Estimated Bonus
On time
0.55
48000
26400
1 Week Late
0.3
36000
10800
2 Weeks Late
0.15
24000
3600
Total Estimated Bonus
40800
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