Thomas Consultants provided Bran Construction with assitance in implementing var

Question

Thomas Consultants provided Bran Construction with assitance in implementing various cost-savings initiatives. Thomas' contract specifies that it will receive a flat fee of $50,000 and an additional $20,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that Bran will acheive the cost-savings target.

1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the transaction price.

2. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the transaction price.

3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain of that estimate due to a lack of experience with similar consulting arrangements. Calculate the transaction price.

Explanation / Answer

As Thomas Consultants uses expected value as its estimates of variable consideration the transaction price should be $70,000 ($50,000 +$20,000).

2. The most likely amount would be most appropriate when the amount of variable consideration has two possible outcomes. In applying the constraint the Thomas Consultants to decide whether it is probable (70-80% chance) that the variable consideration, or a portion thereof, would not be reversed. Since receiving any variable consideration is subject to achieving the cost targets and its probability assumed by Bran is only 20%. In our view the transaction price should be $50,000 only.

3. If Thomas uses expected value but uncertain of the outcome, then the transaction price should be $50,000. As discussed and explained above.

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