Question
Exercise 1: Homer Company enters into several contractual arrangements with various baseball players to provide home run hitting consulting services. The standard contract for the
Exercise 1: Homer Company enters into several contractual arrangements with various baseball players to provide home run hitting consulting services. The standard contract for the arrangement includes a $1,000 baseline price. The Company also is eligible for performance bonuses. What is the transaction price for each of the following two scenarios?
Scenario 1: Carlos Gonzalez enters into a contract with Homer Company. Homer Company receives a bonus if Gonzalez hits 20 or more home runs in the current season. Homer Company has determined that there is an 85% chance of receiving $1,000 on this contract and a 15% chance of receiving $1,500 on this contract. The Company uses the most likely outcome approach for revenue recognition.
Scenario 2: Carlos Gonzalez enters into a contract with Homer Company. Homer Company receives one of two bonuses. The Company receives $1,500 if Gonzalez hits 20 or more home runs in the current season and $2,000 if Gonzalez receives 30 or more home runs. The Company has determined that there is a 60% chance of receiving $1,000 on this contract, 30% chance of receiving $1,500 on this contract, and a 10% chance of receiving $2,000 on this contract. The Company uses the expected value outcome approach for revenue recognition.
Scenario 1 | Scenario 2 |
The most likely outcome transaction price (only two possibilities) is:
On the day services are provided (assume cash is received later), the journal entry is: | The expected value outcome transaction price ( >2 possibilities) is:
On the day services are provided (assume cash is received later), the journal entry is: |
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