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Variable Consideration On March 1, 2017, Elkhart enters into a new contract to b

ID: 2588844 • Letter: V

Question

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 price

Explanation / 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                   -                       -          4,87,500