REFERENCE: Ref.03_10 Beatty,Inc.acquires 100% of the Voting Stock of Gataux Company on Company

question 42

Multiple Choice

REFERENCE: Ref.03_10
Beatty,Inc.acquires 100% of the voting stock of Gataux Company on January 1,2009 for $500,000 cash.A contingent payment of $12,000 will be paid on April 1,2010 if Gataux generates cash flows from operations of $26,500 or more in the next year.Harrison estimates that there is a 30% probability that Rhine will generate at least $26,500 next year,and uses an interest rate of 4% to incorporate the time value of money.The fair value of $12,000 at 4%,using a probability weighted approach,is $3,461.
-Assuming Gataux generates cash flow from operations of $27,200 in 2009,how will Beatty record the $12,000 payment of cash on April 1,2010 according to SFAS 141(R) ?

• A)Debit Contingent performance obligation $3,461,debit Goodwill $8,539,and Credit Cash $12,000.
• B)Debit Contingent performance obligation $3,461,debit Loss from contingent performance obligation $8,539,and Credit Cash $12,000.
• C)Debit Goodwill and Credit Cash,$12,000.
• D)Debit Goodwill $27,200,credit Contingent performance obligation $15,200,and Credit Cash $12,000.
• E)No entry.

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Definitions:

Short Run

A period in economics during which at least one input, such as plant size, is fixed and cannot be changed.

Physical Capital

Tangible assets such as buildings, machinery, and equipment used in the production of goods and services.

Variable Cost

Costs that vary directly with the level of production, such as raw materials, labor, and energy used in the manufacturing process.

Long Run

A period in economics during which all factors of production and costs are variable, allowing for the full adjustment to changes.