On June 1, 2018, Emmet Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building. The contract starts on July 1, 2018. Under the terms of the contract, Emmet will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%. Emmet estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract.
- Assume Emmet estimates variable consideration as the most likely amount. How much revenue should Emmet recognize on this contract in 2018?
A) $25,000
B) $26,125
C) $28,750
D) $50,000

Question

Quizplus · Accepted Answer

The most likely amount to be received by Emmet is $50,000 per year. Since there is a 30% chance of receiving an additional amount, there is a 70% (100% - 30%) chance of not receiving any additional amount. Therefore the most likely amount of an additional fee is zero. Since six months have elapsed, Emmet should recognize revenue of only the fixed fee for that period: $50,000 × 6/12 = $25,000.

On June 1, 2018, Emmet Property Management Entered into a 2-Year