Question

Mitchell corp enters into a contract with a customer to build an apartment building for 1,300,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of 190,000 to be paid if the building is ready for rental beginning August 1, 2019. The bonus is reduced by 62,000 each week that completion of work is delayed. Klava commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by probability   

1st august 2019 70%  

8th august 2019 20%

15th august 2019 5%

After 15th august 2019 5%

Instructions:

1. Determine the transaction price for this contract, based on the information provided above.

2. Assuming, that Klava is only able to estimate whether the building can be completed by August 1, 2019 , or not, (Klava estimates that there is a 70% chance   that the building will be completed by August 1, 2019), compute the transaction price.

Answer 1

a.)

The Transaction should include management's estimate of the amount of consideration to which the entity will be

entitled. Given the multiple outcomes our probabilities available based on prior experience, the probability weighted

method is the most predictive approach for estimating the variable consideration in the situation.

Completed By

Probability 1 August,2019 70% (70% * 1490000) $1,043,000.00 8th August,2019 20% (20% * 1428000) $285,600.00 15th August,2019 5% (5%   * 1366000) $68,300.00 After 15th August 2019 5% (5%   * 1304000) $65,200.00 Ans $1,462,100.00

b.)

In this Situation, Mitchell Corp must use most Likely estimate i.e. $ 1490000