Question
Majestic Corporation provides call-center ordering services for Essential Oils magazine. Majestic receives an annual fee of $200,000 for providing such services and is also eligible
Majestic Corporation provides call-center ordering services for Essential Oils magazine. Majestic receives an annual fee of $200,000 for providing such services and is also eligible to receive a performance bonus up to $65,000 if the average customer wait times are below certain thresholds at the end of the year.
Using historical results as well as current expectations, Majestic estimates the chances of achieving the different performance bonuses as shown in the table here.
Assume there are NO revenue constraints, and the entity uses the expected value approach to record variable consideration when recognizing revenue during the period. Which is the amount of the performance bonus management can recognize in the transaction price?
Average wait times | Performance Bonus | % Chance of Achieving |
< 1 minute | $65,000 | 15% |
< 2 minutes | $45,000 | 10% |
< 3 minutes | $25,000 | 50% |
< 4 minutes | $5,000 | 20% |
< 5 minutes | 0 | 5% |
a. Management would include the variable consideration in the transaction price in the amount of $27,750.
b. Management would not include the variable consideration in the transaction price because the amount of consideration is outside of the entity's influence.
c. Management would include the variable consideration in the transaction price in the amount of $25,000.
d. Management would not include the variable consideration in the transaction price because the amount of consideration is uncertain and is not expected to be resolved for a long period of time.
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