Reference no: EM132509682

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. Under Option A, Emmet uses the expected value approach to calculate variable consideration. What is the expected total transaction price for the full contract under Option A?

2. And how much revenue should Emmet recognize on this contract in 2016 under option A? (Assume the cost-to-cost method.)

3. Under Option B, Emmet uses the most-likely method to calculate the variable consideration. What is the expected total transaction price for the full contract under Option B?

4. And how much revenue should Emmet recognize on the contract in 2016 under Option B? (Assume the cost-to-cost method.)

5. So, which option (A or B) results in a higher amount of net income in 2016?