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?

Question

Quizplus · Accepted Answer

Beatty will initially record the investment in Gataux at its purchase price of $500,000. However, it also needs to recognize the contingent payment of $12,000 at fair value, which is $3,461. Therefore, the total initial investment recorded by Beatty on January 1, 2010 will be $503,461.