On what basis should the transaction price be allocated to various performance obligations? Identify the approaches for allocating the transaction price.
The three ways for evaluating stand-alone selling price are:
(1) Adjusted market assessment approach
(2) Expected cost plus a margin approach
(3) Residual approach
Transaction pricing refers to the amount of remuneration a seller requires to sell certain goods or services to a customer, which the customer does not pay in cash.
When multiple performance requirements require a transaction price allocation, the allocation is made based on which goods or services the firm can sell on its own (called the stand-alone selling price). If computing the stand-alone selling price is not possible, then a company can use these three options to measure the transaction consideration or price.
Leno Computers manufactures tablet computers for sale to retailers such as Fallon Electronics. Recently, Leno sold and delivered 200 tablet computers to Fallon for $20,000 on January 5, 2017. Fallon has agreed to pay for the 200 tablet computers within 30 days. Fallon has a good credit rating and should have no difficulty in making payment to Leno. (a) Explain whether a valid contract exists between Leno Computers and Fallon Electronics. (b) Assuming that Leno Computers has not yet delivered the tablet computers to Fallon Electronics, what might cause a valid contract not to exist between Leno and Fallon?
Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by Probability
August 1, 2018 70%
August 8, 2018 20
August 15, 2018 5
After August 15, 2018 5
Determine the transaction price for this contract.
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