ExpertMedium1 markMultiple Choice
CPA · Question 26 · Area II: Technical Accounting
Under ASC 606, 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 there is a 70% chance of meeting the deadline (bonus received) and a 30% chance of missing it (no bonus). The company has limited experience with similar contracts.<br/><br/>Using the most likely amount method, what is the transaction price?
Under ASC 606, 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 there is a 70% chance of meeting the deadline (bonus received) and a 30% chance of missing it (no bonus). The company has limited experience with similar contracts.<br/><br/>Using the most likely amount method, what is the transaction price?
Answer options:
A.
$2,140,000
B.
$2,200,000
C.
$2,000,000
D.
$2,060,000
How to approach this question
Identify the method required: 'Most Likely Amount'. This is the single outcome with the highest probability. (Binary: Win or Lose).
Full Answer
B.$2,200,000✓ Correct
B
The 'Most Likely Amount' method is appropriate for binary outcomes (bonus or no bonus). Since the probability of receiving the bonus (70%) is higher than not receiving it, the transaction price includes the full bonus: $2,000,000 + $200,000 = $2,200,000.
Common mistakes
Using expected value method when most likely amount is requested.
Practice the full CPA BAR Practice Exam 4
50 questions · hints · full answers · grading
More questions from this exam
Q01Orion Corp. is analyzing its working capital efficiency. For the current year, Orion reported the...HardQ02A company is analyzing its gross margin variance. The budgeted data for the quarter indicated sal...MediumQ03TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Inter...HardQ04Manufacturing Corp. uses Activity-Based Costing (ABC). The company has identified two cost pools:...MediumQ05During the current month, a company purchased 20,000 pounds of raw material for $42,000. The stan...Medium