Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Br

Question

Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s contract specifies that it will receive a flat fee of $150,000 for providing the customized signs, and an additional $10,000 if 30% of Di Antonio’s new customers indicate they first learned of Di Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a 90% chance it will achieve the threshold to receive a bonus.

REQUIRED:

a. Assuming Brunetti uses the most likely value to estimate the variable consideration, calculate the transaction price.

b. Assuming Brunetti determines transaction price as the "expected value" of the variable consideration, what would be the

appropriate transaction price for this contract?

c. Assume Brunetti uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience

with similar arrangements. What would be the appropriate transaction price?

Explanation / Answer

a. If B uses the most likely value to estimate the variable consideration, the transaction price will be calculated by adding 90% of the variable consideration to the fixed contract fee.

Therefore, in this case, the transaction price will be $159,000 ($150,000 + $10,000×90%).

b. If B determines transaction price as the "expected value" of the variable consideration, then the transactio price will be calculated by adding the total amount of variable consideration to the fixed contract fee.

Therefore, in this case, the transaction price will be $160,000 ($150,000 + $10,000).

c. If Brunetti uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar arrangements, the transaction price will be only the fixed contract fee.

Therefore, in this case, the transaction price will be $150,000.

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