Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1,

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:

1)400,000

2)406,000

3)403,142

4)409, 142

5)416,500

Hint:cash flow as a result they need compensation if they surrender their shares to allow the deal. They did and won the bet. The Parent must now honor the payout. Under the purchase method this will be increase to Goodwill. Under the Acquisition Method, the PV at the time of the bet will be included in acquisition Costs.

PLEASE ADVISE WHAT'S THE CORRECT ANSWER.

Thanks.

Explanation / Answer

Answer 3) $403,142

$400,000 cash + $3142 will also be included

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