A business combination to be accounted for as a merger

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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.

Reference no: EM131776403

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