Question

On April 1, 2015, Roadbuilder Inc. contracts with SandyEnergy, an oil exploration firm, to build a road in northern Alberta, Canada for $15 million. The target deadline for completion of the road is June 30, 2015 (i.e., 3 months). The $15 million will be paid to Roadbuilder in three equal installments of $5 million at the end of each month April – June. To encourage Roadbuilder to finish the road by the June 30 deadline, the contract also stipulates that (1) Roadbuilder will refund SandyEnergy 1% of the sales price if the road is not complete by July 10, 2015 and (2) SandyEnergy will pay Roadbuilder a bonus equal to 1% of the sales price if the road is complete by June 20, 2015. Roadbuilder estimates that there is a 10% probability the road will not be complete by July 10, 2015. Roadbuilder also estimates that there is a 40% probability the road will be complete by June 20, 2015. Assuming Roadbuilder determines the transaction price as the expected value of consideration, and that a significant reversal of variable consideration is not likely, what is the transaction price for this contract

Answer 1