Question

Referring to the revenue arrangement in BE18-6, determine the transaction price for the contract, assuming (a) Nair is only able to estimate whether the building can be completed by August 1, 2018, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2018), and (b) Nair has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.

Short answer

(a) Transaction price of $1,150,000.

(b) No transaction price.

Step-by-step solution

Definition of Transaction Price

The amount of money that a business entity will collect against the product or service provided to the customer is known as the transaction price.

Determination of the Transaction Price

(a) Since the chances of completing the building on 1 August 2018 is 70%, the company will report $1,150,000 as the transaction price.

(b) There is very limited information available for developing the completion estimates. Therefore, the business entity will not recognize any revenue until the completion of the project.