On January 1, 2022 Improving All Company (IAC) enters into a 6 month agreement with Sloppy...

 

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On January 1, 2022 Improving All Company (IAC) enters into a 6 month agreement with Sloppy Company to provide consulting service related to reducing the number of product defects in Sloppy's manufacturing process. The agreement calls for 3 payments of $20,000, every other month, with the first payment due January 1. In addition, if IAC's efforts result in a reduction in the rate of defects per week of 40% or more, Sloppy will pay IAC an additional $12,000 at the end of the contract. Based on its initial analysis of what is necessary to improve Sloppy's manufacturing process, at the start of the contract IAC is only 20% confident it will achieve the target defect- reduction rate related to the additional $12,000. IAC uses most likely amount to determine the transaction price for this contract. a. How many performance obligations are included in this contract? Explain your answer. b. What is the transaction price for this contract? c. Assuming IAC prepares financial statements monthly, how much revenue will it recognize on January 31 on this contract? d. During April, IAC concludes that it is making great progress on improving Sloppy's manufacturing process and now believes that there is an 80% likelihood of earning the additional $12,000. How much revenue will IAC recognize on this contract at the end of April? On January 1, 2022 Improving All Company (IAC) enters into a 6 month agreement with Sloppy Company to provide consulting service related to reducing the number of product defects in Sloppy's manufacturing process. The agreement calls for 3 payments of $20,000, every other month, with the first payment due January 1. In addition, if IAC's efforts result in a reduction in the rate of defects per week of 40% or more, Sloppy will pay IAC an additional $12,000 at the end of the contract. Based on its initial analysis of what is necessary to improve Sloppy's manufacturing process, at the start of the contract IAC is only 20% confident it will achieve the target defect- reduction rate related to the additional $12,000. IAC uses most likely amount to determine the transaction price for this contract. a. How many performance obligations are included in this contract? Explain your answer. b. What is the transaction price for this contract? c. Assuming IAC prepares financial statements monthly, how much revenue will it recognize on January 31 on this contract? d. During April, IAC concludes that it is making great progress on improving Sloppy's manufacturing process and now believes that there is an 80% likelihood of earning the additional $12,000. How much revenue will IAC recognize on this contract at the end of April?

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