Question

Exercise 6-9 (Algo) Variable consideration; estimation and constraint (LO6-6) Thomas Consultants provided Bran Construction with assistance in implementing various cost savings initiatives. Thomas's contract specifies that it will receive a flat fee of $69.000 and an additional $39.000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 25% chance that Bran will achieve the cost savings target Skiped Required: 1. Assuming Thomas uses the expected value as its estimate of variable consideration calculate the transaction price. 2. Assuming Thomas uses the most ikely value as its estimate of variable consideration calculate the transaction price 3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain of that estimate due to a lack of experience with similar consulting arrangements Calculate the transaction price Complete this question by entering your answers in the tabs below. Regt Reg 2 and 3 Assuming Thomas uses the expected value as its estimate of variable consideration calculate the transaction price Possible Amounts Probabilities Expected contract price incepion Req2 and 3 >

Answer 1

Requirement

1.

Compute transaction price as follows:

Particulars	Amount
Flat fee	$69,000
Add: Expected cost savings ($39000*25%)	$9,750
Total	$78,750

The probability of expected cost savings of $39,000 is 25%, therefore the variable amount is proportionately evaluated for the transaction price.

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2.

Most likely event means when the probability of occurring of an event is higher than the probability of an event not occurring. in the present situation, the probability of achieving the additional cost is 25%, which is not the most likely event, therefore the flat fee should be considered while computing the transaction price.

In this case, Transaction price should be Fixed flat fee = $69000.

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3.

Variable Consideration always comes with uncertainty due to lack of experience and involves a large amount of uncertainty in the calculation of the estimated value of variable amount but in the present situation transaction price will not include variable amount of consideration.

Hence, the transaction price should be $69,000