Advanced Accounting 11th Edition by Paul Fischer,William Tayler, Rita Cheng

Exercise 39

Contingent consideration. Gull Company purchased the net assets of Hart Company on January 1, 2011, and made the following entry to record the purchase:
Current Assets............................................. 100,000
Equipment................................................ 150,000
Land..................................................... 50,000
Buildings................................................. 300,000
Goodwill................................................. 100,000
Liabilities............................................... 80,000
Common Stock ($1 par).................................... 100,000
Paid-In Capital in Excess of Par.............................. 520,000
Make the required entry on January 1, 2013, for each of the following independent contingency agreements:
1. An additional cash payment will be made on January 1, 2013, equal to twice the amount by which average annual earnings of the Hart Division exceed $25,000 per year, prior to January 1, 2013. Net income was $50,000 in 2011 and $60,000 in 2012. Assume that the liabilities recorded on January 1, 2011, included an estimated contingent liability recorded at an estimated amount of $40,000.
2. Added shares will be issued on January 1, 2013, equal in value to twice the amount by which average annual earnings of the Hart Division exceed $25,000 per year, prior to January 1, 2013. Net income was $50,000 in 2011 and $60,000 in 2012. The market price of the shares on January 1, 2013, will be $5.
3. Added shares will be issued on January 1, 2013, to compensate for any fall in the value of Gull common stock below $6 per share. The settlement will cure the deficiency by issuing added shares based on their fair value on January 1, 2013. The market price of the shares on January 1, 2013, will be $4.