ExpertHard1 markMultiple Choice
CPA · Question 27 · Area 2: Select Accounts
A construction company enters a contract with a bonus clause. If completed by Dec 31, they get a $100,000 bonus. Based on history, they estimate a 60% chance of finishing on time (getting $100k) and 40% chance of being late ($0). Under ASC 606, what amount of variable consideration should be included in the transaction price?
A construction company enters a contract with a bonus clause. If completed by Dec 31, they get a $100,000 bonus. Based on history, they estimate a 60% chance of finishing on time (getting $100k) and 40% chance of being late ($0). Under ASC 606, what amount of variable consideration should be included in the transaction price?
Answer options:
A.
$60,000
B.
$40,000
C.
$0
D.
$100,000
How to approach this question
Two methods for variable consideration: 1. Expected Value (sum of probability-weighted amounts) - good for many outcomes. 2. Most Likely Amount - good for binary (yes/no) outcomes. Here, it's binary.
Full Answer
D.$100,000✓ Correct
D
ASC 606 allows two methods: Expected Value or Most Likely Amount. For a binary outcome (bonus or no bonus), the Most Likely Amount is the better predictor. Since it is more likely than not (60%), the full $100,000 is included (assuming no constraint on reversal).
Common mistakes
Using Expected Value ($60k) for a binary event.
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