Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time.
-Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
A) $1,000
B) $1,333
C) $1,400
D) $1,200

Question

Sanjeev enters into a contract offering variable consideration. The contract pays him $1,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $2,000 and a 40% chance the contract will pay an additional $3,000, depending on the outcome of the consulting contract. Sanjeev concludes that this contract qualifies for revenue recognition over time. 
-Assume Sanjeev estimates variable consideration as the most likely amount. What is the amount of revenue Sanjeev would recognize for the first month of the contract?
A) $1,000
B) $1,333
C) $1,400
D) $1,200

Quizplus · Accepted Answer

The most likely outcome is that Sanjeev receives the $2,000 bonus (likelihood = 60%), in which case Sanjeev would be paid a total of ($1,000 × 6 months) + $2,000, or $8,000. Therefore, Sanjeev would recognize $8,000 ÷ 6 = $1,333 each month.

Sanjeev Enters into a Contract Offering Variable Consideration