Reference no: EM132477877

Question - Emmet Property Management entered into a 2-year contract on June 1, 2016, to build an apartment building. The contract starts on July 1, 2016. Under the terms of the contract, Emmet will be paid a fixed fee of $1,500,000 and will receive an additional 10% of the fixed fee provided that building is ready to occupy at the end of the two years. Emmet estimates a 60% chance it will meet the completion date.

The total costs of the project are expected to be $1,200,000, and the costs to date (at the end of 2016) are $400,000.

1. What is the expected total transaction price for the full contract? (Assume the expected value approach to calculate the variable consideration.)

2. How much revenue should Emmet recognize on this contract in 2016? (Assume the cost-to-cost method.)

3. How much revenue should Emmet recognize on this contract in 2016? (Assume most-likely method.)

4. What is the effect on net income of using the expected-value approach versus the most-likely method?