Question

On March 1, 2017, Elkhart enters into a new contract to build a specialized warehouse for $7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2017, Elkhart will receive a bonus of $600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by $150,000. Elkhart provides the following completion schedule:

Probability of Completion:

November 30, 2017 60%

December 7, 2017 20%

December 14, 2017 10%

December 21, 2017 5%

December 28, 2017 5%

1. Assume that Elkhart used the expected value approach. What amount should Elkhart use for the transaction price?

2. Assume that Elkhart used the most likely approach. What amount should Elkhart use for the transaction price?

3. What is the objective of determinng the transaction price based on the amount of variable consideration?

Answer 1

1) If Expected value Approach is followed then Transaction Price is calculated From the Weighted Average Probabilities of revenue receivable as follows

Date of Completion	Probability(%)	Transaction Price	Weighted Avg Price
30.11.2017	60%	7600000	4560000
7.12.2017	20%	7450000	1490000
14.12.2017	10%	7300000	730000
21.12.2017	5%	7150000	357500
28.12.2017	5%	7000000	350000
Expected Transaction Price($)			7487500

2) If Most likely Approach is followed Revenue shall be recognised at the Most likely outcome with Probability of 60% completion date on 30.11.2017 = $7.6 Million

3)To allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for delivering the promised obligation to the customer