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Write your response and explain your reasoning.
Fictional Summit Systems has an established Topic 606 contract with fixed consideration of $120,000. Summit can earn a $12,000 bonus if an outside laboratory certifies the system by March 31. Certification and no certification are the only bonus outcomes. The supplied likelihood of certification is 70 percent, and the most-likely-amount method is stipulated as the better predictor.
The laboratory controls certification. Summit has completed only two projects under this specification, and neither provides useful predictive evidence. The uncertainty will remain until the laboratory reports. For arithmetic practice, the case stipulates that $6,000 of the estimated bonus passes the constraint at contract inception.
Prepare a dated consideration ledger. Show the expected-value and most-likely estimates, identify the selected method, separate the amount included from the amount constrained, and compute transaction price. Explain the reversal-risk facts, the next update trigger, and what the arithmetic does not establish. Then distinguish an expected price concession at contract inception from a later decline in the customer's ability to pay an unconditional receivable.
Use ASC 606-10-32-5 through 32-9 for variability and estimation and 32-11 through 32-14 for the constraint and updates.
Compare your reasoning with the worked answer
The bonus has two outcomes, so the supplied most-likely-amount method produces a $12,000 estimate because certification is the more likely outcome. The expected-value calculation is $8,400: $12,000 multiplied by 70 percent. It is not the selected estimate and is not revenue.
The outside laboratory controls certification, Summit has little predictive experience, and the uncertainty will remain through March 31. Those facts increase the likelihood or magnitude of a reversal. The case stipulates that $6,000 passes the constraint. The other $6,000 of the most-likely estimate is constrained. Transaction price is $126,000: fixed consideration of $120,000 plus the included bonus of $6,000. This arithmetic does not prove the constraint judgment, allocate consideration, or establish revenue.
Summit must reassess the estimate and constraint at each reporting date and when the laboratory result arrives. A customary inception-date expectation that Summit will accept less than the stated price may be a price concession that reduces entitlement. A later decline in the customer's ability to pay an unconditional receivable is ordinarily a credit-loss issue. The cause of the lower expected cash receipt decides the accounting path.