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 acquisition cost of $400,000 as the investment in Rhine on January 1, 2010. The contingent payment of $16,500 will be recognized only if Rhine generates cash flows from operations of $27,000 or more in the next year. Using a probability weighted approach, the fair value of this contingent payment is $3,142. Therefore, the total investment in Rhine on January 1, 2010 will be $400,000 + $3,142 = $403,142.