# Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for \$400,000 cash

QUESTION:

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 the Rhine generates cash flows from operations of \$27,000 or more in the next year. Harrison estimates that there is a 20% probability that the 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 the Rhine on January 1, 2010?

A. \$400,000

B. \$403,142

C. \$406,000

D. \$409,142

E. \$416,500

B. \$403,142.

 Harrison will record a contingent performance obligation for the amount of \$3,142 Entry at the time of payment of 16,500 would have been Contingent performance obligation Dr 3,142.00 Loss from the revaluation of the contingent performance obligation 13,358.00 To Cash A/C 16,500.00 Thus the amount of investment would be 400,000+ 3,142 = 403,142 since Harrison will record a contingent performance obligation for the amount of \$3,142