Question

Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2021 with a performance bonus of $50,000 if the building is completed by July 31, 2021. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by Probability
July 31, 2021 65%
August 7, 2021 25%
August 14, 2021 5%
August 21, 2021 5%
Required:
a. The transaction price for this transaction is _________.

Answer 1

Answer:

$995,000

Explanation:

July 31,2021

$950,000 + ($50,000 ×.65)

=950,000+ 32,500

=982,500

August 7,2021

=982,500+ ($40,000 ×.25)

=982,500+10,000

=992,500

August 14, 2021

992,500 + ($30,000 ×.05)

992,500 + 1500

=994,000

August 21,2021

994,000 + ($20,000 ×.05)

994,000 + 1,000 = $995,000

Therefore the transaction price for this transaction is $995,000

Answer 2

Answer:

Transaction price based on expected value approach.

July 31, 2018 ($950,000+$50,000)*.65 $650,000

August 7, 2018 ($950,000+$40,000)*.25 $247,500

August 14, 2018 ($950,000+$30,000)*.05 $49,000

August 21, 2018 ($950,000+$20,000)*.05 $48,500

Total  $995,000

$995,000 is the correct answer.