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Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux 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 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation? Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000. Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000. Debit Goodwill and Credit Cash $12,000. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000. No entry.

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Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux 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 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation? Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000. Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000. Debit Goodwill and Credit Cash $12,000. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000. No entry.



$1500

The contingent obligation is the liability payment event that may or may not occur in the future due to the happening of another event. It is the obligation that is not fixed or absolute for the payment.  The payment depends on the future event.

The cash payment of $12,000 by Betty will be recorded as follows:

Debit Contingent performance obligation $3,461, debit Loss from revaluation ofcontingent performance obligation $8,539, and Credit Cash $12,000

Reasons:

  • The amount of $3,461 will come under contingent performance obligation because the chances of the payment of the fair value are not certain.

  • The remaining amount of $8,539 is the fixed amount of loss for the company because only the fair value will be paid off not its revalued amount.

  • The cash of $12,000 will be credited as it is an outflow for the company.

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