Question

Pharoah Construction enters into a contract with a customer to build a warehouse for $870000 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. Pharoah 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

$915,000

Step-by-step explanation:

The computation of the transaction price based on the expected value approach is presented below:

The formula is

= (Building cost of warehouse + bonus) × probability percentage

Date Calculation Amount

July 31, 2021 ($870,000+$50,000) × 0.65 $598,000

August 7, 2021 ($870,000+$40,000) × 0.25 $227,500

August 14, 2021 ($870,000+$30,000) × 0.05 $45,000

August 21, 2021 ($870,000+$20,000) × 0.05 $44,500

Total $915,000

Since the bonus is reduced $10,000 each week so $10,000 is subtracted for every delayed week