Question

Refer to the information in Question 14. Assume that Allee has limited experience with a construction project on the same scale as the ten speedboats. How does this affect the accounting for the variable consideration?

Short answer

In this circumstance, it lacks experience with previous contracts and is unable to estimate the entire income. Allee should not record any payments at this time.

Step-by-step solution

Definition of Variable Consideration

Variable consideration is a broad term that encompasses a wide range of items such as increases in price, rebates, and reimbursements. Even though the quantity is constant, consideration is considered variable if the amount an entity will get is contingent on the occurrence ornon-occurrence of a future event.

Affect on the accounting for the variable consideration

Variable consideration shall be allocated to performance obligation by Allee only if it expects to be paid that amount. In this circumstance, it lacks experience with previous contracts and is unable to estimate the entire income. Payments should not be recorded by Allee at this time. Due to the prospect of a considerable reversal of previously recognized revenue, Allee is constrained in recognizing variable consideration.