On June 1, 2021, Consulting Inc. enters into a contract with a customer to build a website for its start-up business for $100,000, plus a possible performance bonus. The contract includes the creation of the website to communicate information about the customer’s products, to sell products, and to collect payment for the products. The target completion date for the project is October 22, 2021. The pricing of the customized website includes a potential performance bonus to be paid to Consulting Inc. if the website is completed between October 1 - October 22, 2021. The performance bonus will be reduced each week closer to the October 22, 2021 deadline. A bonus will not be paid if the project is completed after October 22, 2021. Based on Consulting Inc.’s historical experience and the assessment of its current capabilities, the potential bonuses/probability are summarized in the table below: Completion Date Probability of Outcome Performance Bonus October 1, 2021 60% $5,000 October 8, 2021 20% 4,000 October 15, 2021 15% 3,000 October 22, 2021 5% 2,000 Indicate which method is appropriate in estimating the variable consideration. Estimate the transaction price for Consulting Inc.’s revenue contract.
On June 1, 2021, Consulting Inc. enters into a contract with a customer to build a website for its start-up business for $100,000, plus a possible performance bonus. The contract includes the creation of the website to communicate information about the customer’s products, to sell products, and to collect payment for the products. The target completion date for the project is October 22, 2021. The pricing of the customized website includes a potential performance bonus to be paid to Consulting Inc. if the website is completed between October 1 - October 22, 2021. The performance bonus will be reduced each week closer to the October 22, 2021 deadline. A bonus will not be paid if the project is completed after October 22, 2021. Based on Consulting Inc.’s historical experience and the assessment of its current capabilities, the potential bonuses/probability are summarized in the table below:
Completion Date Probability of Outcome Performance Bonus
October 1, 2021 60% $5,000
October 8, 2021 20% 4,000
October 15, 2021 15% 3,000
October 22, 2021 5% 2,000
- Indicate which method is appropriate in estimating the variable consideration.
- Estimate the transaction price for Consulting Inc.’s revenue contract.
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