Question

Romeo Construction enters into a contract with a customer to build a warehouse for $800,000 on March 30, 2014, with an additional performance bonus of $50,000 if the building is completed by July 31, 2014. The bonus is reduced by $10,000 each week that completion is delayed.

Romeo commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by Probability
July 31, 2014 65%
August 7, 2014 25%
August 14, 2014 5%
August 21, 2014 5%

The transaction price for this transaction is ______.

Answer 1

$845,000

Explanation:

The computation of transaction price for this transaction is shown below:-

Transaction price = (Performance bonus on July 31, 2014 × Probability percentage on July 31, 2014) + (Performance bonus on July 7, 2014 × Probability percentage on July 7, 2014) + (Performance bonus on July 14, 2014 × Probability percentage on July 14, 2014) + (Performance bonus on July 21, 2014 × Probability percentage on July 21, 2014)

= ($50,000 × 65%) + (($50,000 - $10,000) × 25%) + (($50,000 - $10,000 - $10,000) × 5%) + ((($50,000 - $10,000 - $10,000 - $10,000) × 5%)

= $32,500 + $10,000 + $1,500 + $1,000

= $45,000

Transaction Price = Warehouse + Transaction price

= $800,000 + $45,000

= $845,000

We simply applied the above formula