Variable Consideration On March 1, 2017, Elkhart enters into a new contract to b
ID: 2588844 • Letter: V
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Variable Consideration On March 1, 2017, Elkhart enters into a new contract to build a specialized warehouse for $7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2017, Elkhart will receive a bonus of $600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by $150,000. Elkhart provides the following completion schedule: Expected Completion Date Probability November 30, 2017 December 7, 2017 December 14, 2017 December 21, 2017 December 28, 2017 Required: 1. Assume that Elkhart uses the expected value approach. What amount should Elkhart use for the transaction price? 60% 20 10 2. Assume that Elkhart uses the most likely amount approach. What amount should Elkhart use for the transaction price? Transaction priceExplanation / Answer
1. Expected value is the sum of probability weighted amounts
Transaction price= Initial price + bonus amount
Initial price= 7 million
Bonus under expected value method:
Bonus expected value= 487500
Transaction price= 7000000+487500= 7487500
Most likely amount method:
Bonus with highest probability= 600000*60%= 360000
Transaction price= 7000000+360000 = 7360000
Date Probability Bonus Penalty Outcome Weighted amount a b c d=b-c e=d*a Nov.30 60% 6,00,000 - 6,00,000 3,60,000 Dec.7 20% 6,00,000 1,50,000 4,50,000 90,000 Dec.14 10% 6,00,000 3,00,000 3,00,000 30,000 Dec.21 5% 6,00,000 4,50,000 1,50,000 7,500 Dec.28 5% 6,00,000 6,00,000 - - 4,87,500Related Questions
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