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      Question

      Consideration is ₹1.90 crore fixed plus a ₹20 lakh

      performance bonus if go-live is achieved in 4 months (historically achieved only 40% of the time). A modest penalty of ₹5 lakh applies if go-live slips beyond 6 months (historically 10% occurrence). At contract inception, what is the most appropriate treatment of variable amounts?
      A Include net ₹15 lakh using expected value; constraint not applied due to small magnitude. Correct Answer Incorrect Answer
      B Exclude ₹20 lakh bonus due to low probability; include ₹5 lakh penalty immediately as it’s likely not to occur. Correct Answer Incorrect Answer
      C Estimate variable consideration using expected value (probability-weighted) but apply constraint to exclude the bonus until highly probable that significant reversal will not occur. Correct Answer Incorrect Answer
      D Use most likely amount: ₹0 bonus, ₹0 penalty, recognize only fixed ₹1.90 crore. Correct Answer Incorrect Answer
      E Recognize full ₹2.10 crore since outcomes can be estimated reliably from history. Correct Answer Incorrect Answer

      Solution

      Variable consideration may be estimated (expected value fits multiple outcomes), but revenue recognized must be constrained if there’s a risk of significant reversal. With only 40% historical success for the bonus, it’s not “highly probable” at inception; penalty likelihood is low—typically no recognition until outcome clarity.

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