Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2020 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2021 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, 2020?

Question

Quizplus · Accepted Answer

Harrison will record the investment at the purchase price plus the fair value of the contingent consideration. The purchase price is $400,000, and the fair value of the contingent consideration is $3,142, making the total investment $403,142.