Question

On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what amount of revenue will be recorded at the end of the first month

Answer 1

$4,700

Step-by-step explanation:

Fixed fee - $48,000

Conditional bonus - $12,000

Condition for bonus = $100,000 cost saving

Estimate of achieving cost saving = 70%

As Guarder does not have an 100% assurance of meeting the $100,000 cost saving , the bonus will be multiplied by the estimated percentage of achieving it , being the most likely amount

Estimated bonus = 70%* $12,000= $8,400

Total annual contract fee = 48000+ $8,400 = $56,400

Month revenue recognition = 56,400/12 = $4,700

January recognition = $4,700.

Revenue are earned when earned , therefore the January portion of earned revenue is recorded.