Question

Sheridan Corp. enters into a contract with a customer to build an apartment building for $990,500. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $147,300 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $49,100 each week that completion is delayed. Sheridan commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by		Probability
August 1, 2018		70	%
August 8, 2018		20
August 15, 2018		5
After August 15, 2018		5

(a) Determine the transaction price for the contract, assuming Sheridan is only able to estimate whether the building can be completed by August 1, 2018, or not (Sheridan estimates that there is a 70% chance that the building will be completed by August 1, 2018). (If answer is 0, please enter 0. Do not leave any fields blank.)

Transaction Price

$

(b) Determine the transaction price for the contract, assuming Sheridan has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline. (If answer is 0, please enter 0. Do not leave any fields blank.)

Transaction Price

$

Answer 1

Answer: Determination of Transaction Price for the Contract

A)

Completed By	Probability	Calculation	Bonus
August 1, 2018	70%	147,300 x 70%	$ 103,110
August 8, 2018	20%	98,200 x 20%	$ 19,640
August 15, 2018	5%	49,100 x 5%	$ 2,455
After August 15, 2018	5%	0 x 5%	$ -
Total Bonus			$ 125,205

So Transaction Price will be = $990,500 + $ 125,205 = $ 1,115,705

B)

No revenue shall be recognised as per IAS 18, unless there is a reliable estimate of completion by the August 1,2018, deadline.