Question

Wonder Land Co. (WLC) is open to public nursery that sells a full range of lawn and garden products and also offers landscape design and installation services. It has entered into a contract with a homeowner for a project that it believes will take a little over three weeks to complete. The customer plans to put the house on the market in one month and so has required HGC to include a penalty clause in the contract: In particular, if the project takes longer than four weeks to complete, the $50,000 contract price will be cut in half to $25,000. Based on the latest weather forecasts, WLC believes there is a 60% chance it will be able to finish the project before the four-week deadline.

Required—Indicate the transaction price for this sale under FASB ASC 606 in each of the following

independent scenarios:

1. Scenario #1 – WLC believes the expected value better measures its revenue under the contract.

2. Scenario #2 – WLC believes the most likely amount better measures its revenue under the contract.

Answer 1

1.)	Estimation of transaction price under expected value method
	Probability	Penalty	Weighted Amount
	60%	0	0
	40%	25,000	10,000
	Penalty amount		$ 10,000
	Transaction price = $ 40,000        ( 50,000 - 10,000 )
2.)	Estimation of transaction price under Most likely method -
	Transaction price will be $ 50,000
	$ 25,000 of Penalty is constraint . Constraint likely has no effect because entity concludes it is probable (60% ) that the project will be finish before the four week deadline .