# (Solved Homework): Kelley Inc. enters into 10-month contract offering variable consideration. The contract pays…

Kelley Inc. enters into 10-month contract offering variable consideration. The contract pays \$5,000 per month. In addition Kelley Inc. can receive \$10,000 if customer sales have increased sufficiently. When entering into the contract Kelley Inc. expects that there is a 75% probability that it will receive the \$10,000 bonus payment.

Assume that after 5 months Kelley Inc. revises it’s estimate of the probability that it will receive the bonus to 60%.

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What is the revenue that Kelley Inc. will recognize in the 10th month if it turns out that it will receive the \$10,000 bonus payment and if it uses the expected value method?

Revenue in 10th month:

= Fixed payment+Bonus payment

= \$5,000+\$10,000

= \$15,000

Hence, revenue recognized as per expected value method is \$15,000.

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