Concept explainers
Estimating Variable Consideration. King Rat Pest Control, Incorporated was recently hired to exterminate pests in an office complex for $300,000. King Rat will receive an additional $10,000 based on the success of the extermination. The additional $10,000 will be paid in full if the extermination is fully successful after one month. That amount will be decreased to $8,000 if the extermination is successful after two months and further reduced to $5,000 if successful after three months. Based on past experience with similar contracts, King Rat estimates that there is a 20% probability that the process will be successful with the first month, a 75% probability that it will take two months to be successful, and a 5% probability that the process will be effective after three months.
Required
- a. Determine the transaction price for this contract using the expected value approach.
- b. Determine the transaction price for this contract using the most-likely-amount approach
![Check Mark](/static/check-mark.png)
Want to see the full answer?
Check out a sample textbook solution![Blurred answer](/static/blurred-answer.jpg)
Chapter 8 Solutions
INTERMEDIATE ACCOUNTING-MYACCOUNTINGLAB
- Your company must ensure the safety of its work force. Two plans are being considered for the next 10 years: 1. Install a high electrified fence around the property at a cost of $100, 00. Maintenance and electricity would then cost $5,000 per year over the 10 year life of the fence. 2. Hire security guards at a cost of $25,000 paid ate the end of each year. Because the company plans to build new headquarters with a “state of the art” security system in 10 years, the plan will be in effect only until that time. Your company’s cost of capital is 15% for average risk projects. Plan 1 is considered to be of low risk because its costs can be predicted quite accurately. Plan 2, on the other hand is a high-risk project because of the difficulty of predicting wage rates. What is the proper PV costs for the better project?arrow_forwardA supermarket is planning on piloting a self- checkout system in one of its stores. It estimates that this requires an investment of about $500,000 to modify existing checkout lanes into self-checkout lanes. It also estimates that it will save $200,000 yearly in employee salaries by automating the checkout process. If the supermarket's MARR is at 10% per year compounded annually, determine the payback period (in years) for this pilot.arrow_forwardMetropolitan Water Utility is planning to upgrade its SCADA system for controlling well pumps, booster pumps, and disinfection equipment so that everything can be controlled from one site. The first phase will reduce labor and travel costs by an estimated $31,000 per year. The second phase will reduce costs by an estimated $20,000 per year. If phase I will occur in years 1 through 3 and phase II in years 4 through 8, what is (a) the present worth of the savings, and (b) the equivalent annual worth for years 1 through 8 of the savings? Use an interest rate of 8% per year. Solve using tabulated factors and a spreadsheet.arrow_forward
- A municipal police department has decided to acquire an unmanned dronefor aerial surveillance of a high-crime region of their city. Three mutually exclusive drones are being studied and their data are provided below. All alternatives are expected to have negligible market (salvage) values at the end of five years. The police department’s MARR is 8% per year. Which droneshould be selected?arrow_forwardNeed answers, ASAP . The Kasibu Cooperative has invested a 145,000 new mechanical grading/sorter system which is projected to improve throughput and increase revenue by 14,000 per year for five years. The estimated market value of the sorter system at the end of five years is 5,000. Using the FW method at a MARR of 12%, is this a good investment?arrow_forwardA grocery distribution center is considering whether to invest in RFID or bar code technology to track its inventory within the warehouse and truck loading operations. The useful life of the RFID and bar code devices is projected to be 5 years with minimal or zero salvage value. The bar code investment cost is $105,000 and can be expected to save at least $33,000 in product theft and lost items annually. The RFID system is estimated to cost $230,000 and will save $30,000 the first year, with an increase of $15,000 annually after the first year. For a 6% MARR, should the manager invest in the RFID system or the bar code system? Analyze incrementally using rate of return.arrow_forward
- A design company is evaluating the purchase of automatic tools to automate the design process. The company just purchased a Software for $5000 now and annual payments of $500 per year for 3 years starting 3 years from now for annual upgrades. The company benefits from a governmental incentive on the software of $1000 at year 5. Using a rate of 10% per year and a predicted life of 5 years, find the equivalent TOTAL present wortharrow_forwardYour company must ensure the safety of its work force. Two plans are being considered for the next 10 years: (1) Install a high electrified fence around the property at a cost of $100,000. Maintenance and electricity would then cost $5,000 per year over the 10-year life of the fence. (2) Hire security guards at a cost of $25,000 paid at the end of each year. Because the company plans to build new headquarters with a "state of the art" security system in 10 years, the plan will be in effect only until that time. Your company's cost of capital is 15 percent for average-risk projects, and that rate is normally adjusted up or down by 2 percentage points for high- and low-risk projects. Plan 1 is considered to be of low risk because its costs can be predicted quite accurately. Plan B, on the other hand, is a high-risk project because of the difficulty of predicting wage rates. What is the proper present value of costs for the better project?arrow_forwardBe sure to answer all parts of this question. A nut processing facility in the Central Valley of California supplies both inshell and shelled walnuts and almonds to retailers. An analyst recently obtained estimates to install a new cooling system and needs to evaluate life-cycle costs at the company's before-tax MARR of 8% per year. The system would be used for eight years, and the estimates are: Preliminary feasibility study (this year, year 0) $50,000 Purchase & install system (this year, year 0) $2,500,000 Annual operating costs (years 1-8) Salvage value (year 8) Other phase-out activities (year 8) $150,000 in year 1, increasing by $10,000 each year $250,000 $100,000 a. What is the capital recovery (CR) cost of the system? [Select] b. What is the annual equivalent worth of the annual operating costs for eight years? I Select) [ Select ] c. What is the annual equivalent cost of this project?arrow_forward
- An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $426,000, and annual maintenance costs are estimated to be $6,400 per year. As an alternative, a holding pond can be provided a short distance away at an initial cost of $180,000 for the pond plus $90,000 for pumps and piping. Annual operating and maintenance costs for the pumps and holding pond are estimated to be $17,000. The planning horizon is 20 years, and at that time, neither alternative has any salvage value. Determine the preferred alternative based on a present worth analysis with a MARR of 20%/year.arrow_forwardCapital Investment Analysis; Jones Excavation Company is planning an investment of $190,800 for a bulldozer. The bulldozer is expected to operate for 1,000 hours per year for five years. Customers will be charged $140 per hour for bulldozer work. The bulldozer operator costs $33 per hour in wages and benefits. The bulldozer is expected to require annual maintenance costing $10,000. The bulldozer uses fuel that is expected to cost $43 per hour of bulldozer operation. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192arrow_forwardThe National Park Service is considering two plans for rejuvenating the forest and landscape of a large tract of public land. The study period is indefinitely long, and the Park Service’s MARR is 10% per year. You have been asked to compare the two plans using the CW method. The first plan (Skylin) calls for an initial investment of $500,000, with expenses of$20,000 per year for the first 20 years and $30,000 per year thereafter. Skyline also requires an expenditure of $200,000 20 years after the initial investment, and this will repeat every 20 years thereafter. The second plan (Prairie View) has an initial investment of $700,000 followed by a single (one time) investment of $300,000 30 years later. Prairie View will incur annual expenses of $10,000 forever. Based on the CW measure, which plan would you recommend?arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education
![Text book image](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781259964947/9781259964947_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337272094/9781337272094_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337619202/9781337619202_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780134475585/9780134475585_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781259722660/9781259722660_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781259726705/9781259726705_smallCoverImage.gif)