Question

Ostro Company enters into a contract with Zelman Company to give financial advice for a one year term. Ostro will receive a weekly set fee and in addition will receive a performancebased incentive at the end of the year based on complicated formula but generally based on the investment profits Zelman Company receives related to the assets that Ostro manages. At what point should Ostro recognize the management fee and the performancebased incentive related to Zelman?

Answer 1

Ostro Company should recognize the management fee as revenue over the one-year term, while the performance-based incentive should be recognized as revenue at the end of the year.

Step-by-step explanation:

Ostro Company should recognize the management fee and the performance-based incentive related to Zelman at different times.

The management fee should be recognized as revenue and recorded over the course of the one-year term. Each week, Ostro should recognize a portion of the fee as revenue.

The performance-based incentive, on the other hand, should be recognized as revenue at the end of the year when the amount can be determined based on the formula. This is because the incentive is contingent upon Zelman's investment profits, which would only be known at the end of the year.