On January 1st, Guarder Consulting enters into a one-year contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. Smith pays Guarder an up-front fixed fee of $48,000 on January 1st. Guarder will also earn an additional $12,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 70% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the most likely amount, what amount of revenue will be recorded at the end of the first month

$4,700

Explanation:

Fixed fee - $48,000

Conditional bonus - $12,000

Condition for bonus = $100,000 cost saving

Estimate of achieving cost saving = 70%

As Guarder does not have an 100% assurance of meeting the $100,000 cost saving , the bonus will be multiplied by the estimated percentage of achieving it , being the most likely amount

Estimated bonus = 70%* $12,000= $8,400

Total annual contract fee = 48000+ $8,400 = $56,400

Month revenue recognition = 56,400/12 = $4,700

January recognition = $4,700.

Revenue are earned when earned , therefore the January portion of earned revenue is recorded.

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