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 and

appropriate journal entry for each of the following two scenarios?

Scenario 1: Homer Company enters into a contract and provides services to Nolan Arenado.

Homer Company receives a bonus if Arenado hits 30 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 ($1,000 base amount plus $500 bonus)

on this contract. The Company uses the most likely outcome approach for revenue

recognition.

Scenario 2: Homer Company enters into a contract and provides services to Nolan Arenado.

Homer Company has the potential to receive one of two bonuses: a $500 bonus if Arenado

hits 30 or more home runs in the current season or an $800 bonus if Arenado hits 40 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 ($1,000 base amount plus $500

bonus) on this contract, and a 10% chance of receiving $1,800 ($1,000 base amount plus

$800 bonus) on this contract. The Company uses the expected value outcome approach for

revenue recognition.

Scenario 1

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:

Scenario 2

The expected value outcome transaction

price ( >2 possibilities) is:

On the day services are provided (assume

cash is received later), the journal entry is: