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Harrison- Inc- acquires 100- of the voting stock of Rhine Company on J.docx

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.
Solution
A. \$400,000 (At the acquisiton cost)
.

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.
Solution
A. \$400,000 (At the acquisiton cost)
.