Thomas Consultants provided Bran Construction with assistance with implementing various cost-savings initiatives.
Thomas' contract specifies that it will receive a flat rate of $50,000 and an additional $20,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that Bran will achieve the cost-savings target.
1. Assuming Thomas uses a probability-weighted transaction price, calculate the amount of the transaction price.
2. Assuming Thomas uses the most likely value as the transaction price, calculate the amount of the transaction price.
3. Assuming Thomas is trying to apply the revenue recognition rules most appropriately, do you think the company is more likely to use the probability-weighted amount or the most likely value? Briefly explain your answer.
4. Assume that Thomas provides a plan for Bran, but Bran is responsible for implementing it. Also assume that Thomas delivers the plan in the first quarter of the year, but Bran will be implementing the plan and determining total cost savings over the entire year. Should Thomas recognize the entire transaction price when it delivers the plan? Briefly explain your reasoning.

  • CreatedDecember 23, 2013
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