Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by Probability
August 1, 2015 70%
August 8, 2015 20
August 15, 2015 5
After August 15, 2015 5

Required:
Determine the transaction price for this contract.

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anthougo anthougo · Answer 1 · 2022-03-28T14:06:42+02:00

The determination of the transaction price for this contract for Nair Corp. is as follows:

Completed by Probability:

Date Probability Bonus/Penalty Outcome

August 1, 2015 70% $150,000 $105,000 ($150,000 x 70%)

August 8, 2015 20% $50,000 -10,000

August 15, 2015 5% $50,000 -2,500

After August 15, 2015 5% $50,000 -2,500

Total expected value of performance bonus = $135,000

Contract value = $1,000,000

Total transaction price = $1,135,000 ($1,000,000 + $135,000).

A transaction price is the amount of consideration expected to be paid or received for the exchange of goods or services.

A transaction price can vary based on timing or performance factors.

Contract value = $1,000,000

Performance bonus = $150,000

Penalty per week in performance bonus = $50,000

The total transaction price is $1,135,000.

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