Question

Nair corp. enters into a contract with a customer to build an apartment building for $1,000,000. the customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning august 1, 2026. the bonus is reduced by $50,000 each week that completion is delayed. nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: completed by probability august 1, 2026 70% august 8, 2026 20 august 15, 2026 5 after august 15, 2026 5 determine the transaction price for this contract. be17.7 (lo 2) referring to the revenue arrangement in be17.6, determine the transaction price for the contract, assuming if nair is only able to estimate whether the building can be completed by august 1, 2026, or not (nair estimates that there is a 70% chance that the building will be completed by august 1, 2026)?

A) $700,000
B) $800,000
C) $900,000
D) $1,000,000

Answer 1

To determine the transaction price with a bonus dependent on completion by a certain date and a known probability, multiply the bonus amount by the probability. With a 70% chance of completing on time and a $150,000 bonus, the expected bonus is $105,000. Added to the base price of $1,000,000, the transaction price would be $1,105,000, which is not listed among the given options A, B, C, or D.

Step-by-step explanation:

The student has asked to determine the transaction price for a contract where Nair Corp. has different probabilities of completing an apartment building by certain dates, with a bonus and penalties attached to these dates. When only able to estimate completion by August 1, 2026, with a 70% probability and the bonus is $150,000, we apply the expected value to estimate the transaction price:

• Probability of completion on time: 70% x $150,000 = $105,000
• Probability of missing the deadline: 30% x $0 (no bonus if not completed by August 1) = $0
• The transaction price would thus include the expected bonus: $1,000,000 (base price) + $105,000 (expected bonus) = $1,105,000

However, none of the options given (A, B, C, D) include this value, indicating either a mistake in the given options or a misunderstanding of the question. Therefore, none of the provided answers (A) $700,000, (B) $800,000, (C) $900,000, or (D) $1,000,000, matches the calculated transaction price of $1,105,000.