Question 1

A construction company enters into a contract to build a warehouse for $2,000,000. The contract includes a $200,000 bonus if completed by year-end. The company estimates a 70% chance of meeting the deadline (bonus received) and 30% chance of missing it (no bonus). The company has limited experience with similar projects. Under ASC 606, what is the transaction price at inception?

Accepted Answer

1. Estimate Variable Consideration (Expected Value vs Most Likely). 2. Apply Constraint: Is it probable that a significant reversal will NOT occur? If experience is limited, constrain (exclude) the bonus.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Using expected value for a binary outcome; ignoring the constraint due to uncertainty.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA BAR Practice Exam 2

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