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.When recording consideration transferred for the acquisition of Rhine on January 1, 2020, 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

Question

Quizplus · Accepted Answer

The contingent performance obligation is recorded at its fair value, which is calculated using the probability-weighted approach. The fair value of $16,500 at a 5% interest rate, considering a 20% probability, is $3,142.