Question

Which of the following is false regarding contingent consideration in business combinations?

A) contingent consideration payable in cash is reported under liabilities
B) contingent consideration payable in stock shares is recorded under stockholders' equity
C) contingent consideration is recorded because of its substantial probability of eventual payment
D) the contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on the future performance of the target or future stock price of the acquirer
E) contingent consideration is reflected in the acquirer's balance sheet at the present value of the potential expected payment

Answer 1

The false statement about contingent consideration in business combinations is that contingent consideration payable in stock shares is recorded under stockholders' equity; instead, it's initially recorded at fair value as a liability or asset.

Step-by-step explanation:

The false statement regarding contingent consideration in business combinations is: B) contingent consideration payable in stock shares is recorded under stockholders' equity. This is incorrect because the contingent consideration, whether it's payable in cash or stock, is initially recorded as part of the consideration transferred in a business combination and thus measured at its fair value and recognized as part of the acquisition. This means it's typically recorded as a liability or an asset on the acquirer's balance sheet, depending on the nature of the contingency. It is not recorded under stockholders' equity unless it is settled, at which point, if it is in stock, it would affect equity.

Contingent consideration is recognized because there is a substantial probability of future payment (C), it is a part of the acquisition's fair value (D), and is reflected on the balance sheet at the present value of potential expected payment (E'). Options A and C through E are generally true statements, making B the false option.