Moover Construction enters into a contract with a customer to build a warehouse

Question

Moover Construction enters into a contract with a customer to build a warehouse for $900,000 on June 30, 2017, with a performance bonus of $60,000 if the building is completed by October 31, 2017. The bonus is reduced by $20,000 each week that completion is delayed. The contract also states that if the warehouse receives a favorable safety inspection rating from government inspectors by November 30, Moover will receive a performance bonus of $40,000. Moover commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability October 31, 2017 35% November 7, 2017 50% November 14, 2017 10% November 21, 2017 5% In addition, Moover estimates there is a 90% chance that the warehouse will receive a favorable safety inspection rating upon timely completion. a. Assume Moover uses the expected value approach. Determine the transaction price for this transaction. b. Assume Moover uses the most likely amount approach. Determine the transaction price for this transaction
Moover Construction enters into a contract with a customer to build a warehouse for $900,000 on June 30, 2017, with a performance bonus of $60,000 if the building is completed by October 31, 2017. The bonus is reduced by $20,000 each week that completion is delayed. The contract also states that if the warehouse receives a favorable safety inspection rating from government inspectors by November 30, Moover will receive a performance bonus of $40,000. Moover commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability October 31, 2017 35% November 7, 2017 50% November 14, 2017 10% November 21, 2017 5% In addition, Moover estimates there is a 90% chance that the warehouse will receive a favorable safety inspection rating upon timely completion. a. Assume Moover uses the expected value approach. Determine the transaction price for this transaction. b. Assume Moover uses the most likely amount approach. Determine the transaction price for this transaction
Moover Construction enters into a contract with a customer to build a warehouse for $900,000 on June 30, 2017, with a performance bonus of $60,000 if the building is completed by October 31, 2017. The bonus is reduced by $20,000 each week that completion is delayed. The contract also states that if the warehouse receives a favorable safety inspection rating from government inspectors by November 30, Moover will receive a performance bonus of $40,000. Moover commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability October 31, 2017 35% November 7, 2017 50% November 14, 2017 10% November 21, 2017 5% In addition, Moover estimates there is a 90% chance that the warehouse will receive a favorable safety inspection rating upon timely completion. a. Assume Moover uses the expected value approach. Determine the transaction price for this transaction. b. Assume Moover uses the most likely amount approach. Determine the transaction price for this transaction

Explanation / Answer

In expected value approach each outcome is multiplied by the probability and the sum will be the expected value of the outcomes

Transaction price is $900,000 + $79,000 = $979,000

Most likely amount approach only considers those outcomes where probability is more than 50% and other outcomes the payoff is considered as zero

Transaction price is $900,000 + $40,000 + $40,000 = $980,000

Dates Amount Probability Expected Value A B A X B Oct-31 60000 35% 21000 Completion bonus Nov-07 40000 50% 20000 Completion bonus Nov-14 20000 10% 2000 Completion bonus Nov-21 0 5% 0 Completion bonus Nov-30 40000 90% 36000 Favorable safety inspection 79000

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