On January 1, 2024, a consulting company, Horizons LLC, agreed to provide 40 hours of consulting services to a struggling local taxi company over the next six months. Because the taxi company is struggling, the contract specifies that they will pay Horizons LLC $12,000 on July 1, 2024, after all services have been provided. Horizons LLC estimates that there is a 50% chance they will receive payment, but they are hopeful that their consulting services will be able to turn the taxi company’s financial situation around. Between January 1, 2024 and March 31, 2024, Horizons provided 16 hours of consulting services. How much of this revenue should Horizons recognize by March 31, 2024? Single choice
A
$4,800
B
$6,000
C
$9,600
D
$0

Question

On January 1, 2024, a consulting company, Horizons LLC, agreed to provide 40 hours of consulting services to a struggling local taxi company over the next six months. Because the taxi company is struggling, the contract specifies that they will pay Horizons LLC $12,000 on July 1, 2024, after all services have been provided. Horizons LLC estimates that there is a 50% chance they will receive payment, but they are hopeful that their consulting services will be able to turn the taxi company’s financial situation around. Between January 1, 2024 and March 31, 2024, Horizons provided 16 hours of consulting services. How much of this revenue should Horizons recognize by March 31, 2024? Single choice

A

$4,800

B

$6,000

C

$9,600

D

$0

BlackTom AI · Accepted Answer

Under ASC 606 / IFRS 15, revenue is recognized only when a performance obligation is satisfied and it is probable the entity will collect the consideration to which it is entitled. Collectibility must be probable (more likely than not); mere hope or a 50% chance does not satisfy that criterion.

Step‑by‑step reasoning:
1. Identify the performance and contract terms: Horizons agreed to provide 40 hours total for $12,000, payable on July 1 after all services are provided.
2. Determine the portion of performance completed by March 31: Horizons delivered 16 hours out of 40 hours, so performance completion = 16/40 = 0.40 (40%).
   Calculation: 16 ÷ 40 = 0.4.
3. If collectibility were probable, recognized revenue would equal the portion of performance completed times the contract price:
   Calculation: 0.4 × $12,000 = $4,800.
4. Apply the collectibility criterion: Horizons estimates only a 50% chance of receiving payment. Under the revenue standard, 50% does not meet the “probable” threshold. Because collectibility is not probable at March 31, revenue cannot be recognized for the services performed to date. Instead, recognition should be deferred until either collectibility becomes probable or cash is received (e.g., when payment is actually collected on July 1).

Why the correct answer is $0:
- The required recognition condition (probable collectibility) is unmet, so no revenue is recorded despite partial performance.

Why the other choices are incorrect:
- $4,800: equals 40% of $12,000 and would be correct only if collectibility were probable — it is not.
- $6,000: equals 50% of $12,000 (or could imply recognizing expected value), but revenue standards do not permit recognition based on a 50% chance of payment.
- $9,600: does not correspond to the performed proportion (16/40) and has no basis here.