Question

BE8-8. Estimating Variable Consideration. Sellet Billboard Company entered into an agreement to display bill. board advertising for Wynne Incorporated for 10 months for a $60,000 fixed fee. The agreement also includes a potential bonus based on certain goals. Sellet believes the following probability estimates on receiving a bonus are accurate: Expected bonuss 1600 20% = Bonus Probability $8,000 $6,000 - 58% - 3,980 580 $4,000 > 17% = 680 $2,000 5% = 100 What approach should Sellet use to estimate variable consideration? What is the estimate of the consideration amount in this contract?

Answer 1

Solution:

Seller should use expected value approach to estimate variable consideration.

Bonus Amount	Probability of Outcome	Revenue Recognized
$8,000.00	20%	$1,600.00
$6,000.00	58%	$3,480.00
$4,000.00	17%	$680.00
$2,000.00	5%	$100.00
Variable consideration		$5,860.00
Fixed fee		$60,000.00
Estimated consideration amount		$65,860.00