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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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One of the more difficult issues that companies face in recognizing revenue is determining the transaction price. In cases where the consideration in a contract includes a variable amount, an entity should estimate the amount of consideration to which it is entitled in exchange for transferring the promised goods or services.

Required:

Discuss the methods a company may use to estimate variable consideration and the situations in which one method may he preferred over another.

To determine

Enumerate the methods a company uses to estimate variable consideration and the situation.

Explanation

The two methods for estimating variable consideration provided by revenue standard are as follows:

1. Expected Value Method: In “Expected value method”, the expected value is the total of the “probability-weighted amounts” in a range of probable consideration amounts.

2. Most Likely Amount Method: In “Most likely amount method”, the most likely amount is the single most possible sum in a range of probable consideration amounts...

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