ExpertHard1 markMultiple Choice
CPA · Question 25 · Area II: Technical Accounting
A construction company enters into a contract to build a warehouse for $2,000,000. The contract includes a $200,000 bonus if completed by year-end. The company estimates a 70% chance of meeting the deadline (bonus received) and 30% chance of missing it (no bonus). The company has limited experience with similar projects. Under ASC 606, what is the transaction price at inception?
A construction company enters into a contract to build a warehouse for $2,000,000. The contract includes a $200,000 bonus if completed by year-end. The company estimates a 70% chance of meeting the deadline (bonus received) and 30% chance of missing it (no bonus). The company has limited experience with similar projects. Under ASC 606, what is the transaction price at inception?
Answer options:
A.
$2,000,000
B.
$2,140,000
C.
$2,200,000
D.
$2,060,000
How to approach this question
1. Estimate Variable Consideration (Expected Value vs Most Likely). 2. Apply Constraint: Is it probable that a significant reversal will NOT occur? If experience is limited, constrain (exclude) the bonus.
Full Answer
A.$2,000,000✓ Correct
Due to limited experience, the variable consideration is constrained. Recognizing the bonus (even the probability-weighted amount) risks a significant reversal if the deadline is missed. Therefore, only the fixed $2M is recognized initially.
Common mistakes
Using expected value for a binary outcome; ignoring the constraint due to uncertainty.
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