Question

Q.6

On January 1, 2022, the Manhattan Internet Company entered into an agreement with the Bronklyn Caming Cenins for 6 month period. Under the agreement:
- Manhattan allows Brooklyn games subseribers to aceess the games on Manhattan intersat Syutem fot a fised fce of 5500,000
- Manhattan also will rhi Brooklyn's advertisements of other products during the games fot satitietsi] $200,000 if the number subscribers' hours are 20,009 hours at least.
- Manhattan estimates a probability of 80% that it will achicve the target bours.
Required:
Calculate the total contract value and give entry on 1/1/2022 and 1/31/2022 by Manhattan using
1. The Expected Value Method
2. 2. The Most likely Method

Answer 1

The total contract value based on the Expected Value Method would be $660,000, accounting for the fixed fee and the probability-weighted additional revenue. Under the Most Likely Amount Method, the value may be the same or just the fixed fee of $500,000, depending on how 'most likely' is interpreted. Relevant journal entries would be made on 1/1/2022, with additional entries throughout the contract as needed for revenue recognition.

Step-by-step explanation:

The question involves calculating the total contract value between Manhattan Internet Company and Bronklyn Caming Cenins based on two different revenue recognition methods: the Expected Value Method and the Most Likely Amount Method.

Expected Value Method

Under the Expected Value Method, the total contract value is calculated by considering the probability of various outcomes. In this case, Manhattan estimates an 80% chance of achieving the target hours which would result in additional revenue of $200,000. The expected revenue from this portion of the contract is calculated as:

• Probability of achieving target hours (80%) * additional revenue ($200,000) = $160,000
• The fixed fee of $500,000 would be added to this amount.
• Total expected contract value = $500,000 + $160,000 = $660,000

The journal entry on 1/1/2022 would involve debiting a contract asset or receivable and crediting revenue for $660,000.

There would be no entry on 1/31/2022 specific to this calculation unless part of the service was delivered warranting revenue recognition.

Most Likely Amount Method

Under the Most Likely Amount Method, the revenue recognized is the amount with the highest likelihood. If 80% is a high enough likelihood to be considered 'most likely,' then the same calculation as the Expected Value Method would apply. However, if the threshold for 'most likely' is stricter and does not consider 80% to be sufficient, then only the fixed fee of $500,000 would be recognized.

The journal entry on 1/1/2022 will reflect this decision, and no entry will be posted on 1/31/2022 unless required for the recognition of revenue as services are rendered.