Teal Corp. enters into a contract with a customer to build an
apartment building for $991,300. The customer hopes to rent
apartments at the beginning of the school year and provides a
performance bonus of $147,900 to be paid if the building is ready
for rental beginning August 1, 2021. The bonus is reduced by
$49,300 each week that completion is delayed. Teal commonly
includes these completion bonuses in its contracts and, based on
prior experience, estimates the following completion
outcomes:
Completed by | Probability | ||
---|---|---|---|
August 1, 2021 |
70 | % | |
August 8, 2021 |
20 | ||
August 15, 2021 |
6 | ||
After August 15, 2021 |
4 |
Determine the transaction price for this contract.
Transaction Price |
Solution:
Computation of Expected Performance Bonus | |||
Particulars | Bonus Amount | Probability | Expected Value |
Completion by Aug 1, 2021 | $147,900.00 | 70% | $103,530.00 |
Completion by Aug 8, 2021 | $98,600.00 | 20% | $19,720.00 |
Completion by Aug 15, 2021 | $49,300.00 | 6% | $2,958.00 |
Completion after Aug 15, 2021 | $0.00 | 4% | $0.00 |
Expected Bonus | $126,208.00 |
Transaction price = $991,300 + $126,208 = $1,117,508
Teal Corp. enters into a contract with a customer to build an apartment building for $991,300....
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