On January 1, 2018, Elite Advertising was contracted to run a marketing campaign for Pharm King's new dieting pills. In addition to getting a base fee of $150,000 for the 3-year campaign, Elite also may get an additional 5% of the base fee as a bonus if a targeted sales level is reached at the end of three years. Elite currently lacks sufficient information to make an estimate of the likelihood of the expected bonus, with the marketing director indicating that "If you forced me to make an estimate, I'd say we have a 50/50 chance. But don't quote me on that - it's really too early to tell." Elite concludes this contract qualifies for revenue recognition over time, and estimates variable consideration using the most likely amount. How much revenue should Elite recognize as of December 31, 2018?
A) $50,000
B) $51,250
C) $52,500
D) $57,500

Question

Quizplus · Accepted Answer

Elite would not include the bonus in its estimate of the transaction price, as it is not probable that the bonus revenue would not have to be reversed at a future date. Therefore, Elite would use a $150,000 transaction price, and since it provided advertising services for 1/3 of the duration of the contract, would recognize revenue of $50,000 = $150,000 × 1/3.

On January 1, 2018, Elite Advertising Was Contracted to Run