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Accounting treatment for the contingent consideration

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Reference no: EM133197522

CCN decided to acquired Kakapo Limited (KKP). On 1 April 2019, CCN issued 2,000,000 of its own shares (fair value of $10 per share on 1 April 2019) and paid $6,000,000 in cash to the shareholders of Kakapo Limited (KKP), to acquire 100% of the shares of KKP. KKP is not related to CCN before this business combination.

To induce the shareholders of KKP to accept the offer, CCN gave a guarantee where CCN agreed to pay additional cash of $1,500,000, if the 2,000,000 shares issued did not have at a value of $8 per share at 1 October 2019. Fair value of this contingent consideration was estimated to be $400,000 at the date of acquisition.

On 1 October 2019, the market price of the 2,000,000 shares issued by CCN was $7 per share, which is below the guaranteed value of $8 per share. Therefore, on 10 October 2019, CCN had paid $1,500,000 in cash to meet the contingency. The impact of this contingent consideration has to be included in the preparation of the financial statements of CCN and KKP for the year ended 31 March 2020.

Required:

Discuss and advise the accounting treatment for the contingent consideration of $1,500,000 paid by CCN as a result of the guarantee. Illustrate your response by showing the related journal entries.

Reference no: EM133197522

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