On June 1, 2016, Emmet Property Management entered into a 2-year contract to ove

Question

On June 1, 2016, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional $7,500 at the end of each year provided that building exceeds a certain threshold. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract. Assume that Emmet accrues revenue each month, and estimates variable consideration as the most likely amount. On November 1, Emmet revises its estimate of the chance the building will exceed the occupancy threshold to a 70% chance. What is the total amount of revenue Emmet should recognize on this contract in November of 2016?

Explanation / Answer

Solution: $7,291

Working:

$50,000 × 4/12 = $16,667 (m/o July, Sep, Oct & Nov)

$50,000 + $7500 = $57,500

By the end of Novembe, Emmet need to recognized revenue totaling $57,500 * 5/12 = $23,958

Thus amount revenue Emmet should recognize in November = $23,958 - $16,667 = $7,291

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