REFERENCE: Ref.03_09 Harrison,Inc.acquires 100% of the Voting Stock of Rhine Company on Company

question 37

Multiple Choice

REFERENCE: Ref.03_09
Harrison,Inc.acquires 100% of the voting stock of Rhine Company on January 1,2009 for $400,000 cash.A contingent payment of $16,500 will be paid on April 15,2010 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.
-Assuming Rhine generates cash flow from operations of $27,200 in 2009,how will Harrison record the $16,500 payment of cash on April 15,2010 according to SFAS 141(R) ?

• A)Debit Contingent performance obligation $16,500,and Credit Cash $16,500.
• B)Debit Contingent performance obligation $3,142,debit Loss from contingent performance obligation $13,358,and Credit Cash $16,500.
• C)Debit Investment in Subsidiary and Credit Cash,$16,500.
• D)Debit Goodwill and Credit Cash,$16,500.
• E)No entry.

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Definitions:

Central Bank

The primary monetary authority of a country, responsible for regulating the financial system, issuing currency, and controlling inflation and interest rates.

Lender of Last Resort

An institution, usually a central bank, that offers loans to banks or financial institutions that are struggling financially or are considered highly illiquid.

Financial Panics

Instances of widespread fear and anxiety among investors and the general public leading to rapid withdraws from banks or sell-offs in markets, often triggering economic downturns.

Open Market

A freely competitive market in which any buyer or seller can participate, and prices are determined by supply and demand.