Question:
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 nachieve the cost-savings target.
Required:
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.
Answer:
Requirement 1
$50,000 + ($20,000 x 20%) = $54,000
Requirement 2
The most likely amount is $50,000, because the probability of exceeding the performance threshold
is less than 50%.
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 nachieve the cost-savings target.
Required:
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.
Answer:
Requirement 1
$50,000 + ($20,000 x 20%) = $54,000
Requirement 2
The most likely amount is $50,000, because the probability of exceeding the performance threshold
is less than 50%.
