In January 2018, Continental Fund Services, Inc., enters into a one-year contract with a client to provide investment advisory services. The company will receive a management fee, prepaid at the beginning of the contract,that is calculated as 1% of the client’s $150 million total assets being managed. In addition, the contract specifiesthat Continental will receive a performance bonus of 20% of any returns in excess of the return on the Dow JonesIndustrial Average market index. Continental estimates that it will earn a $2 million performance bonus, but isvery uncertain of that estimate, given that the bonus depends on a highly volatile stock market. On what transaction price should Continental base revenue recognition?
In January 2018, Continental Fund Services, Inc., enters into a one-year contract with a client to provide investment advisory services. The company will receive a management fee, prepaid at the beginning of the contract,
that is calculated as 1% of the client’s $150 million total assets being managed. In addition, the contract specifies
that Continental will receive a performance bonus of 20% of any returns in excess of the return on the Dow Jones
Industrial Average market index. Continental estimates that it will earn a $2 million performance bonus, but is
very uncertain of that estimate, given that the bonus depends on a highly volatile stock market. On what transaction price should Continental base revenue recognition?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
