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?
|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|