Which method is appropriate to use to determine the amount of variable consideration? Determine the transaction price.
Velocity, a publicly traded corporation with a calendar fiscal year, entered into an agreement with Wedding Planners, Inc. an wedding event planning company on September 15, 2021. The contract specifies that the services will begin on October 1, 2021. Velocity will design a marketing strategy to increase “hits” on Wedding Planners website by 40%. The contract will last for 3 months (though December 31, 2021). Wedding Planners promises to pay $25,000 at the beginning of each month for Velocity’s services with the first payment on October 1, 2021. At the end of the contract, Velocity will be entitled to an additional $10,000 bonus, depending on whether traffic on Wedding Planners’ website has increased by the desired 40%. At the inception of the contract, Velocity estimated there is a 80% chance that they will earn the $10,000 bonus and 20% likelihood they will not. These probabilities are based on past experience with similar projects and the company has significant experience in these types of projects.
- Which method is appropriate to use to determine the amount of variable consideration?
- Determine the transaction price.
Contracts can be defined as agreements that are legally binding two or more parties together to perform certain activity or event upon the specified time period. A contract is legally enforceable by law, and upon its failure, the law has the right to take legal actions against the parties.
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