On April 1 st , Bob the Builder entered into a contract of one-month duration to

Question

On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,000 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 30% of the base fee if the project finished 2 weeks early and 10% if the project finished a week early. The probability of finishing 2 weeks early is 30% and the probability of finishing a week early is 60%.

What is the expected transaction price with variable consideration estimated as the expected value?

(A) $5,500

(B) $5,750

(C) $4,750

(D) $5,000

Explanation / Answer

expected transaction price with variable consideration estimated as the expected value

B) $5750

REASON: if the project finished 2 weeks early (Nolan offered to pay an additional 30% of the base fee)

$5000*30%=$1500

if the project finished 1 week early (Nolan offered to pay an additional 10% of the base fee)

$5000*10%=$500

Assigning probabllities=1500*.30+500*.60

=$750

base price-$5000

so transaction price with variable consideration=$5750

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