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Management expects that it will offer a price decrease of 5% during the price protection period. Management
concludes that it is highly probable that a significant reversal of cumulative revenue will not occur if estimates
change.

How should the manufacturer determine the transaction price?
SOLUTION

The transaction price is Rs 950, because the expected reimbursement is Rs 50 (5% x 1,000). The expected
payment to the retailer is reflected in the transaction price at contract inception, as that is the amount of
consideration to which the manufacturer expects to be entitled after the price protection. The manufacturer
will recognise a liability for the difference between the invoice price and the transaction price, as this
represents the cash that it expects to refund to the retailer. The manufacturer will update its estimate of

expected reimbursement at each reporting date until the uncertainty is resolved.

Q7. (NOV 20)

A contractor enters into a contract with a customer to build an asset for Rs. 1,00,000, with a performance
bonus of Rs. 50,000 that will be paid based on the timing of completion. The amount of the performance
bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract
requirements are similar to those of contracts that the contractor has performed previously, and management

believes that such experience is predictive for this contract. The contractor concludes that the expected value
method is most predictive in this case.
The contractor estimates that there is a 60% probability that the contract will be completed by the agreed-
upon completion date, a 30% probability that it will be completed one week late, and a 10% probability that it
will be completed two weeks late.
Determine the transaction price.

SOLUTION
The transaction price should include management‖s estimate of the amount of consideration to which the

entity will be entitled for the work performed.
Probability-weighted Consideration
Rs.1,50,000(fixed fee plus full performance bonus) x 60% Rs.90,000
Rs.1,45,000 (fixed fee plus 90% of performance bonus) x 30% Rs.43,500
Rs.1,40,000 (fixed fee plus 80% of performance bonus) x 10% Rs.14,000
Total probability-weighted consideration Rs.1,47,500

The total transaction price is Rs. 1,47,500, based on the probability-weighted estimate. The contractor will
update its estimate at each reporting date.

Q8. (MAY 21)

A manufacturer gives warranties to the purchasers of its goods. Under the terms of the warranty, the
manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent
within three years from the date of sale to the purchasers.
On 30 April 20X1, a manufacturing defect was detected in the goods manufactured by the entity between 1
March 20X1 and 30 April 20X1.

At 31 March 20X1 (the entity‖s reporting date), the entity held approximately one week‖s sales in inventories.
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