Question

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010, for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011, if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability-weighted approach, is $3,142.
When recording consideration transferred for the acquisition of Rhine on January 1, 2010, Harrison will record a contingent performance obligation in the amount of:

a) $628.40. b) $2,671.60. c) $3,142.00. d) $13,358.00. e) $16,500.00.

Answer 1

Answer:

c) $3,142.00

Explanation:

The recording of the contingent performance obligation should be recorded at $3,142 which should be equal to the fair value of $16,500 at 5% using the probability-weighted approach

Moreover, at the time of payment, the journal entry is

Contingent performance obligation Dr   $3,142

Loss from revaluation of contingent performance obligation $13,358  

              To Cash A/C $16,500

(Being the cash paid is recorded)