Question

Sanjee enters into a contract offering variable consideration. The contract pays him $1100/month for six months of continuous consulting services. In addition, there is a 70% chance the contract will pay an additional $2800 and a 30% chance the contract will pay an additional $1200, depending on the outcome of the consulting contract. Sanjee concludes that this contract qualifies for revenue recognition over time.

Assume that Sanjee estimates variable consideration as the most likely amount. After Sanjee has recognized revenue for two months of the contract, he changes his assessment of the chance the contract will pay him $5000 to 50%. What adjustment to revenue should Sanjee recognize to account for that change in estimate?

Answer 1

Sanjeev enters into a contract where the contract pays him in a variable consideration.the contract pays him $1100 per month for 6 months(1100*6)6600 and also the most likely outcome is that sanjeev receives the $2800 bonus (likelihood 70%) in which case sanjeev would ba a paid a total of $6600+$2800 =$9400 .

Therefore sanjeev would recognised $9400/6 =$1566.66 per month and after two month would have recognised (1566.66*2)$3133.32.

then sanjeev conculade that the most likely outcome is that sanjeev receives a $5000(likelihood 50%) in which case sanjeev would be paid a total of (1100*6)$6600 +5000 =$11600 . Therefore sanjeev would have recognised $11600/6=$1933.33 each month and after two month should have recognised(1933,33*2)$3866.66. The amount of adjustmebt sanjeev should report is credit of $733.34, calculated as $3866.66-$3133.32.