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Siddhi enters into a contract offering variable consideration. The contract pays Siddhi $2,000/month for six months of continuous consulting services. In addition, there is a 60% chance the contract will pay an additional $4,000 and a 40% chance the contract will pay an additional $6,000, depending on the outcome of the consulting contract. Siddhi concludes that this contract qualifies for revenue recognition over time. Assume Siddhi estimates variable consideration as the most likely amount. What is the amount of revenue Siddhi would recognize for the first month of the contract?
A. $2,000
B. $2,667
C. $2,800
D. $2,400

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Answer:

B. $2,667

Explanation:

Note that this is NOT an expected value question. The question asks for the most likely amount.

There are two possible bonuses, one of $6,000 with a 40% chance and another of $4,000 with a 60% chance. Since it has higher odds, the $4,000 bonus is the most likely and should be the one considered.

Therefore, his total revenue recognized over 6 months would be:

[tex]R= 6*2,000 +4,000 = 16,000[/tex]

For the first month:

[tex]R_{1} =\frac{16,000}{6}\\R_{1} = \$ 2,667[/tex]

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