A company enters into a contract to build a factory for a customer. The agreed price is $3,000,000 and the specified completion date is 31 December 2021. However, the contract provides that the company should receive an incentive payment of a further $300,000 if the factory is completed by 30 November 2021. Similarly, the price will be reduced by $300,000 if the factory is not completed until after 31 January 2022. The company estimates that there is a 15% probability that the factory will be completed by 30 November 2021, an 80% probability that it will be completed in December 2021 or January 2022 and a 5% probability that it will not be completed until after 31 January 2022.   What is the expected value of the transaction price for this contract? $3,030,000   $3,000,000   $2,985,000   $3,045,000

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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A company enters into a contract to build a factory for a customer. The agreed price is $3,000,000 and the specified completion date is 31 December 2021. However, the contract provides that the company should receive an incentive payment of a further $300,000 if the factory is completed by 30 November 2021. Similarly, the price will be reduced by $300,000 if the factory is not completed until after 31 January 2022.

The company estimates that there is a 15% probability that the factory will be completed by 30 November 2021, an 80% probability that it will be completed in December 2021 or January 2022 and a 5% probability that it will not be completed until after 31 January 2022.

 

What is the expected value of the transaction price for this contract?

    1. $3,030,000

       
    2. $3,000,000

       
    3. $2,985,000

       
    4. $3,045,000

       

 

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