Question

Blossom Construction enters into a contract with a customer to build a warehouse for $930000 on March 30, 2021 with a performance bonus of $50000 if the building is completed by July 31, 2021. The bonus is reduced by $10000 each week that completion is delayed. Blossom commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2021 65% August 7, 2021 25% August 14, 2021 5% August 21, 2021 5% The transaction price for this transaction is

Answer 1

$975,000

Step-by-step explanation:

The computation of transaction price based on expected value approach is shown below:-

For July 31, 2021

= ($930,000 + $50,000) × 0.65

= $637,000

For August 7, 2021

($930,000 + $40,000) × 0.25

= $242,500

For August 14, 2021

($930,000 + $30,000) × 0.05

= $48,000

For August 21, 2021

= ($930,000 + $20,000) × 0.05

= $47,500

Transaction price = July 31, 2021 + August 7, 2021 + August 14, 2021 + August 21, 2021

= $637,000 + $242,500 + $48,000 + $47,500

= $975,000

Therefore, as per the question bonus is reducing $10,000 each week so we computed accordingly.