Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other structures. Recently it completed a waterproofing renovation for a building at a local university. The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the renovation, and an additional $2,500 if there is no roof leaking through the roof within the first year after the renovation. The seller estimates that there is an 85% chance that no leakage will occur within the first year.
Required:
(a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration, calculate the transaction price.
(b) Assuming Omni-Resistor determines transaction price as the "expected value" of the variable consideration, calculate the transaction price.
(c) Assume Omni-Resistor uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar renovations. Calculate the transaction price.

Question

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The Answer of Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other structures. Recently it completed a waterproofing renovation for a building at a local university. The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the renovation, and an additional $2,500 if there is no roof leaking through the roof within the first year after the renovation. The seller estimates that there is an 85% chance that no leakage will occur within the first year.
Required:
(a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration, calculate the transaction price.
(b) Assuming Omni-Resistor determines transaction price as the "expected value" of the variable consideration, calculate the transaction price.
(c) Assume Omni-Resistor uses the "expected value" approach, but is very uncertain of that estimate due to a lack of experience with similar renovations. Calculate the transaction price.