REFERENCE: Ref.03_09
Harrison,Inc.acquires 100% of the voting stock of Rhine Company on January 1,2009 for $400,000 cash.A contingent payment of $16,500 will be paid on April 15,2010 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.
-Assuming Rhine generates cash flow from operations of $27,200 in 2009,how will Harrison record the $16,500 payment of cash on April 15,2010 according to SFAS 141(R)?

Question

Quizplus · Accepted Answer

According to SFAS 141(R), the contingent payment should be recognized at fair value at the acquisition date and any changes to the fair value should be recognized in earnings. In this case, the fair value of the contingent payment at the acquisition date was $3,142. Assuming Rhine generates cash flows from operations of $27,200 in 2009, the contingent payment of $16,500 is probable of being paid, and therefore the fair value remains unchanged. However, the actual payment of $16,500 on April 15, 2010 will result in a loss of $13,358 ($16,500 - $3,142) since the fair value was higher than the actual payment. Therefore, the entry should be to Debit Contingent performance obligation $3,142, debit Loss from contingent performance obligation $13,358, and Credit Cash $16,500.

REFERENCE: Ref.03_09 Harrison,Inc.acquires 100% of the Voting Stock of Rhine Company on Company