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%.
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?