Holt Company enters into a contract to build a new plant facility for Segal Company for $2,500,000. In the contract, Segal will pay a performance bonus of $100,000 if Holt is able to complete the facility by October 1, 20X6. The performance bonus is reduced by 50% for each of the first two weeks after October 1, 20X6. If the completion is delayed more than two weeks, then Holt forfeits the entire performance bonus. Holt's prior experience with performance bonuses on similar contracts indicates the following probabilities of completion outcomes: The slide shows the following text: Completed by October 1, 2006 and its probability is 80%, Completed by October 8, 2006 and its probability is 10%, Completed by October 15, 2006 and its probability is 5%, and Completed after October 15, 2006 and its probability is 5%.
How much should Holt record as the transaction price of the contract and why?
a) $2,500,000 because the performance bonus is not guaranteed
b) $2,600,000 because the most likely outcome is that Holt will deliver the facility by October 1, 20X6
c) $2,461,250 because Holt should use the expected cost method
d) $2,586,250 because Holt should use the expected value method