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 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.
What will Harrison record as its Investment in Rhine on January 1, 2010? Give detail
calculation.
A.
$400,000.
B.
$403,142.
C.
$406,000.
D.
$409,142.
E.
$416,500.
A. $400,000.
Solution
A. $400,000 (At the acquisiton cost)