31 August, 13:19

# 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:a) \$628.40. b) \$2,671.60. c) \$3,142.00. d) \$13,358.00. e) \$16,500.00.

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1. 31 August, 15:06
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c) \$3,142.00

Explanation:

The recording of the contingent performance obligation should be recorded at \$3,142 which should be equal to the fair value of \$16,500 at 5% using the probability-weighted approach

Moreover, at the time of payment, the journal entry is

Contingent performance obligation Dr \$3,142

Loss from revaluation of contingent performance obligation \$13,358

To Cash A/C \$16,500

(Being the cash paid is recorded)