Donner Construction enters into a contract with a customer to build a warehouse for $600,000 on March 30, 2017 with a performance bonus of $30,000 if the building is completed by August 31, 2017. The bonus is reduced by $10,000 each week that completion is delayed. Donner commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by Probability August 31, 2017 60% September 7, 2017 30% September 14, 2017 10%
What is the transaction price for this transaction?
A) $630,000
B) $625,000
C) $615,000
D) $600,000

Question

Quizplus · Accepted Answer

The transaction price is calculated by considering the expected value of the performance bonus based on the probabilities of completion. The expected bonus is calculated as follows: (60% * $30,000) + (30% * $20,000) + (10% * $10,000) = $18,000 + $6,000 + $1,000 = $25,000. Adding this expected bonus of $25,000 to the base contract price of $600,000 gives a transaction price of $625,000.

Donner Construction Enters into a Contract with a Customer to Build