Question

Riverbed Corp. enters into a contract with a customer to build an apartment building for $1,013,300. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $152,100 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $50,700 each week that completion is delayed. Riverbed commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by Probability
August 1, 2021 70%
August 8, 2021 20
August 15, 2021 5
After August 15, 2021 5

Required:
Determine the transaction price for this contract.

Answer 1

Answer: $1,142,585

Explanation:

The transaction price is the contract price in addition to the expected value of the performance bonuses based on its probabilities.

= Contract price + Expected value of bonus

Bonus is to reduce by $50,700 for every week so:

Expected value of bonus = (152,100 * 70%) + ( (152,700 - 50,700) * 20%) + ( (152,700 - 50,700 - 50,700) * 5%) + ( (152,700 - 50,700 - 50,700 - 50,700) * 5%)

= $129,285

Transaction price = 1,013,300 + 129,285

= $1,142,585