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Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $93,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $31,000 or will be entitled to an additional $31,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $31,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $31,000.how to figure out the bonus receivable pays after the fifth month?also the bonus on the fifth month

Question

Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $93,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $31,000 or will be entitled to an additional $31,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $31,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $31,000.

how to figure out the bonus receivable pays after the fifth month?

also the bonus on the fifth month

check_circleAnswer
Step 1

In the given situation, the Velocity firm has two scenerios

1. Receipt of bonus of $31,000  on fulfillment of contract which is an asset

2. Payment of refund of $31,000 on nonfullfillment of contract which is a liability

 

Step 2

In the first 4 months, the company estimated that the chances of fulfillemnt of the contact at 80%. So, the chances of non-fullfillemnt were 20%.

Therefore, the company would record a total revenue each month and accrued asset  =$31,000/8= $3,875

Simultaneously, the company would record an expense and accrued liability each month= 20%*$31,000/8= $6,200/8=$775

Therefore, the total expense and accrued liability for 4 months= %775*4=$3,100

& the total accrued revenue and accrued asset for 4 months= $3,875*4= 15,500

Step 3

After 4 months, the estimates change as the chances to receive the bonus become 60%, so the liability to pay became 40%

So, we have to increase the accrued expense and accrued liability to 40%.

The total liability that...

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