Please find the problem attached
II. On 1/1/15 Big Co. acquired Little Co. in a business combination to be accounted for as a merger. Big paid $400,000 in cash plus a contingent consideration agreement. The contingent consideration agreement provided that additional cash payments would be made to the sellers based upon 3 year cumulative earnings growth, as set out in the following table:
|
3 year cumulative earnings growth
|
Additional payment
|
Likelihood of attaining that target
|
|
<4%
|
$0
|
10%
|
|
4.01% - 6%
|
$10,000
|
35%
|
|
6.01% - 9%
|
$20,000
|
30%
|
|
9.01% +
|
$30,000
|
25%
|
Little Co. had the following trial balance at 1/1/15:
|
|
Book value
|
Fair value
|
|
Cash and receivables
|
40,000
|
40,000
|
|
Inventory
|
50,000
|
55,000
|
|
Land
|
100,000
|
90,000
|
|
Equipment
|
200,000
|
170,000
|
|
Less: Accumulated depreciation, equipment
|
(50,000)
|
|
|
Patents
|
30,000
|
50,000
|
|
|
|
|
|
Current liabilities
|
30,000
|
30,000
|
|
Bonds payable, $100,000 face value
|
100,000
|
105,000
|
|
Common Stock
|
50,000
|
|
|
Paid in capital in excess of par
|
60,000
|
|
|
Retained earnings
|
130,000
|
|
At the end of 3 years, actual 3 year cumulative earnings growth was 5.6%.
Required:
Record the acquisition of Little, as well as the payment after 3 years of any contingent consideration payment.