Question

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation? Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000. Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000. Debit Goodwill and Credit Cash $12,000. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000. No entry.

Answer 1

It is $1,500. Because it is all good.

Answer 2

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation? Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000. Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000. Debit Goodwill and Credit Cash $12,000. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000. No entry.

$1500