Question

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 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.
What will Harrison record as its Investment in Rhine on January 1, 2012?

Answer 1

Answer:

$403,142

Explanation:

To calculate the amount of money that Harrison Inc. should record for its investment in Rhine Company on January 1, we have to add the initial cash payment plus the weighted future value of contingency.

total investment = $400,000 + $3,142 = $403,142