Question

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2007 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2008 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.

Under the FASB Exposure Draft, Business Combinations, what will Harrison record as the acquisition price on January 1, 2007?

the answers are:

A)400,000
B)406,000
C)403,142
D)409, 142
E)416,500

Answer 1

C)403,142

Step-by-step explanation:

The computation of the acquisition price on January 1, 2007 is shown below:

= Probability weighted approach + acquiring voting stock for cash

= $3,142 + $400,000

= $403,142

We simply added the fair value after considering the 5% i.e $3,142 and the acquiring voting stock i.e $400,000

The other items would be ignored that is mentioned in the question