On March 1, 2017, Elkhart enters into a new contract to build a specialized warehouse for $7 million. The promise to transfer the warehouse is determined to be a performance obligation. The contract states that if the warehouse is usable by November 30, 2017, Elkhart will receive a bonus of $600,000. For every week after November 30 that the warehouse is not usable, the bonus will decrease by $150,000. Elkhart provides the following completion schedule:
Probability of Completion:
November 30, 2017 60%
December 7, 2017 20%
December 14, 2017 10%
December 21, 2017 5%
December 28, 2017 5%
Required:
1. Assume that Elkhart used the expected value approach. What amount should Elkhart use for the transaction price?
2. Assume that Elkhart used the most likely approach. What amount should Elkhart use for the transaction price?
3. What is the objective of determinng the transaction price based on the amount of variable consideration?