Felix Corp

question 26

Essay

Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction of 10 yachts for a total price of $10,000,000. The customer needs the boats in its showrooms by March 1, 2018, for the yacht purchase season; the customer will provide a bonus payment of $100,000 if all yachts are delivered by the March 1 deadline. The bonus is reduced by $25,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after March 22, 2018. Felix frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome. How should Felix determine the transaction price under FASB ASC 606 for this contract?

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Definitions:

Blastopore

The opening of the central cavity of an embryo in the early stage of development, which can develop into the mouth or anus in different animals.

Blastocoel

The fluid-filled cavity that forms inside the blastula, an early stage in the embryonic development of animals.

Capacitation

A physiological change that sperm undergo to gain the ability to penetrate and fertilize an egg.

Allantois

An extra-embryonic membrane in birds, reptiles, and mammals that is involved in gas exchange and waste removal.