Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. What will Beatty record as its Investment in Gataux on January 1, 2010?

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Beatty will record the initial investment at its cost of $500,000. However, they will also record a liability for the contingent payment of $3,461 ($12,000 x 0.30 x 0.75), which reflects the probability that Gataux will achieve the required cash flows and the time value of money at 4%. Therefore, the Investment in Gataux on January 1, 2010 will be $500,000 + $3,461 = $503,461.