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.
-When recording consideration transferred for the acquisition of Rhine on January 1, 2010, Harrison will record a contingent performance obligation in the amount of:

Question

Quizplus · Accepted Answer

Harrison will record a contingent liability for the estimated fair value of the performance obligation, which is $3,142, using a probability-weighted approach. Therefore, the correct choice is C. The payment of $16,500 will only be made if Rhine generates $27,000 or more in cash flows from operations in the next year, which is uncertain. Hence, the contingent payment is recognized as a liability and measured at its estimated fair value.