Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2007 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2008 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.
Under the FASB Exposure Draft, Business Combinations, what will Harrison record as the acquisition price on January 1, 2007?
the answers are:
A) 400,000
B) 406,000
C) 403,142
D) 409, 142
E) 416,500
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