Question

Exercise 1: Homer Company enters into several contractual arrangements with various baseball players to provide home run hitting consulting services. The standard contract for the arrangement includes a $1,000 baseline price. The Company also is eligible for performance bonuses. What is the transaction price and appropriate journal entry for each of the following two scenarios? Scenario 1: Homer Company enters into a contract and provides services to Nolan Arenado. Homer Company receives a bonus if Arenado hits 30 or more home runs in the current season. Homer Company has determined that there is an 85% chance of receiving $1,000 on this contract and a 15% chance of receiving $1,500 ($1,000 base amount plus $500 bonus) on this contract. The Company uses the most likely outcome approach for revenue recognition. Scenario 2: Homer Company enters into a contract and provides services to Nolan Arenado. Homer Company has the potential to receive one of two bonuses: a $500 bonus if Arenado hits 30 or more home runs in the current season or an $800 bonus if Arenado hits 40 or more home runs. The Company has determined that there is a 60% chance of receiving $1,000 on this contract, 30% chance of receiving $1,500 ($1,000 base amount plus $500 bonus) on this contract, and a 10% chance of receiving $1,800 ($1,000 base amount plus $800 bonus) on this contract. The Company uses the expected value outcome approach for revenue recognition. Scenario 1: The most likely outcome transaction price (only two possibilities) is: On the day services are provided (assume cash is received later), the journal entry is: Scenario 2: The expected value outcome transaction price (>2 possibilities) is: On the day services are provided (assume cash is received later), the journal entry is:

Exercise 1:
Homer Company enters into several contractual arrangements with various baseball players to provide home run hitting consulting services. The standard contract for the arrangement includes a $1,000 baseline price. The Company also is eligible for performance bonuses. What is the transaction price and appropriate journal entry for each of the following two scenarios?

Scenario 1: Homer Company enters into a contract and provides services to Nolan Arenado. Homer Company receives a bonus if Arenado hits 30 or more home runs in the current season. Homer Company has determined that there is an 85% chance of receiving $1,000 on this contract and a 15% chance of receiving $1,500 ($1,000 base amount plus $500 bonus) on this contract. The Company uses the most likely outcome approach for revenue recognition.

Scenario 2: Homer Company enters into a contract and provides services to Nolan Arenado. Homer Company has the potential to receive one of two bonuses: a $500 bonus if Arenado hits 30 or more home runs in the current season or an $800 bonus if Arenado hits 40 or more home runs. The Company has determined that there is a 60% chance of receiving $1,000 on this contract, 30% chance of receiving $1,500 ($1,000 base amount plus $500 bonus) on this contract, and a 10% chance of receiving $1,800 ($1,000 base amount plus $800 bonus) on this contract. The Company uses the expected value outcome approach for revenue recognition.

Scenario 1:
The most likely outcome transaction price (only two possibilities) is:
On the day services are provided (assume cash is received later), the journal entry is:

Scenario 2:
The expected value outcome transaction price (>2 possibilities) is:
On the day services are provided (assume cash is received later), the journal entry is:

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