Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 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, 2010?

Question

Quizplus · Accepted Answer

Harrison will record the initial investment at the cost of $400,000. However, it must also record the fair value of the contingent payment on acquisition date using a probability weighted approach. The fair value of the contingent payment is $3,142 and therefore the total Investment in Rhine to be recorded on January 1, 2010 is $403,142 ($400,000 + $3,142).