Question

Mowry Maintenance signs a one-year contract to provide janitorial services for a new amusement park. The contract will pay Mowry $10,000 per month as a base fee, and will pay an additional bonus of $60,000 if attendance at the park for the year exceeds a specified threshold. Mowry believes it has a 75% chance of meeting the threshold, and uses an expected value estimate to account for variable consideration. After eight months of the contract, how much revenue will Mowry have recognized?

a) $0
b) $80,000
c) $110,000
d) $120,000

Answer 1

Mowry Maintenance's recognized revenue after eight months consists of eight monthly payments of $10,000 and the expected value of the potential bonus, prorated for the eight-month period, resulting in a total of $110,000 in recognized revenue.

Step-by-step explanation:

To calculate the revenue Mowry Maintenance has recognized after eight months of the contract for providing janitorial services, we need to consider both the fixed monthly payments and the potential bonus. Mowry Maintenance receives $10,000 per month, and there is a potential additional bonus of $60,000 if they meet the attendance threshold. They believe there is a 75% chance of achieving this bonus.

Over eight months, the base fee revenue is:

• 8 months * $10,000/month = $80,000

Considering the potential bonus, we calculate the expected value of the bonus:

• 75% chance * $60,000 bonus = $45,000 expected value of the bonus

To find out how much of the expected bonus has been factored into the revenue for the eight months, we take a proportional amount of the annual expected value:

• (8 months / 12 months) * $45,000 expected bonus value = $30,000

The recognized revenue after eight months is therefore the sum of the base fees and the proportional expected bonus:

• $80,000 (base fees) + $30,000 (proportional expected bonus) = $110,000

Therefore, the correct answer is option c) $110,000.