Question

Brief Exercise 18-7 Oriole Corp. enters into a contract with a customer to build an apartment building for $1,045,500. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $139,800 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $46,600 each week that completion is delayed. Oriole commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by August 1, 2018 August 8, 2018 August 15, 2018 After August 15, 2018 Probability 70% 20 5 (a) Determine the transaction price for the contract, assuming Oriole is only able to estimate whether the building can be completed by August 1, 2018, or not (Oriole estimates that there is a 70% chance that the building will be completed by August 1, 2018). (If answer is 0, please enter O. Do not leave any fields blank.) Transaction Price (b) Determine the transaction price for the contract, assuming Oriole has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline. (If answer is 0, please enter 0. Do not leave any fields blank.) Transaction Price

Answer 1

a. As the revenue recognition used to determine is whether the project gets completed or not by August 1 2018. As the chances of the happening is 70% the chances of completion is higher. thus the company should recognize the transaction price as $1185300

b. As the company has limited information to develop a reliable estimate of completion. Thus the transaction price is $0 till the reliable estimate has been made