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. Assuming Rhine generates cash flow from operations of $27,200 in 2010, how will Harrison record the $16,500 payment of cash on April 15, 2011 in satisfaction of its contingent obligation?

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The contingent payment is recognized based on the probability-weighted fair value, which is determined using the time-value of money. Since it is estimated that there is a 20% chance that Rhine will generate cash flows from operations of $27,000 or more, the fair value of the contingent payment at 5% is $3,142. Therefore, the entry to record the payment on April 15, 2011, is to debit the Contingent performance obligation for $3,142 (the fair value of the obligation), debit the Loss from revaluation of contingent performance obligation account for $13,358 (the difference between the cash paid and the fair value of the obligation), and credit Cash for $16,500.