Indigo Corp. enters into a contract with a customer to build an apartment buildi
ID: 2402357 • Letter: I
Question
Indigo Corp. enters into a contract with a customer to build an apartment building for $1,039,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $148,200 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $49,400 each week that completion is delayed. Indigo commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes Probability Completed by August 1, 2018 August 8, 2018 August 15, 2018 After August 15, 2018 70% 20 Determine the transaction price for this contract. Transaction Price 1187200Explanation / Answer
The transaction price reflects the probability-weighted amount of consideration that an entity expects to receive from the customer in exchange for transferring goods or services.
In many contracts, the transaction price is readily determinable because the customer promises to pay a fixed amount of consideration and that payment is made at or near the time of the transfer of the promised goods or services. In other contracts, the amount of consideration is variable, and the transaction price must be estimated at each reporting period to represent faithfully the circumstances present at the reporting date and the changes in circumstances during the reporting period. The amount of consideration could vary because of discounts, rebates, refunds, credits, incentives, performance bonuses/penalties, contingencies, price concessions, the customer’s credit risk or other similar items.
When determining the transaction price, an entity shall consider the effects of:
(a) Collectability;
(b) The time value of money;
(c) Non-cash consideration; and
(d) Consideration payable to the customer
The entity makes the estimate by using either of the following methods, depending on which method it expects to better predict the amount of consideration to which it’ll be entitled:
(A) Probability- weighted Method:
Fixed price $ 1,039,000
Variable price:
70% chance of $ 148,200 $ 103,740
20% chance of $ 98,800 $ 19,760
( $ 148,200 - $ 49,400 )
5% chance of $ 49,400 $ 2,470
( $ 98,800 - $ 49,400 )
5% chance of $ 0 $ 0
( $ 49,400 - $ 49,400 )
(B) Most likely outcome Method:
70% chance of $ 1,187,200 is the most likely outcome.
Thank You
Transaction Price $ 1,164,970