Chapter 8, Problem 8.3E

Estimating Variable Consideration. King Rat Pest Control, Incorporated was recently hired to exterminate pests in an office complex for $300,000. King Rat will receive an additional $10,000 based on the success of the extermination. The additional $10,000 will be paid in full if the extermination is fully successful after one month. That amount will be decreased to $8,000 if the extermination is successful after two months and further reduced to $5,000 if successful after three months. Based on past experience with similar contracts, King Rat estimates that there is a 20% probability that the process will be successful with the first month, a 75% probability that it will take two months to be successful, and a 5% probability that the process will be effective after three months.

Required

1. a. Determine the transaction price for this contract using the expected value approach.
2. b. Determine the transaction price for this contract using the most-likely-amount approach