Allee Corp is evaluating a revenue arrangement to determine

Allee Corp. is evaluating a revenue arrangement to determine proper revenue recognition. The contract is for construction of 10 speedboats for a contract price of $400,000. The customer needs the boats in its show-rooms by February 1, 2015, for the boat purchase season; the customer provides a bonus payment of $21,000 if all boats are delivered by the February 1 deadline. The bonus is reduced by $7,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after February 15, 2015. Allee frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome.

(a)

What approach should Allee use?

(b)

Determine the transaction price for the contract?

probability-weighted methodmost-likely-amount method

Solution

A) ALLE SHOULD USE THE PROBABILITY METHOD AS IT WILL GIVE THE CLEAR INDICATION HOW THE CONTRACT WILL COME OUT TO BE AND AT WHAT TERMS.

B) TRANACTION RICE WILL BE 400,000 + 0.25*21000=405250