Probability adjusted expected payment for contingency


Question: On June 30, 2009, Sampras Company reported the following account balances:

Receivables        $80,000    Current liabilities                  $ (10,000)
Inventory             70,000    Long-term liabilities                (50,000)
Buildings (net)      75,000    Common stock                       (90,000)
Equipment (net)    25,000    Retained earnings                  (100,000)
Total assets       $250,000   Total liabilities and equities    $(250,000)

On June 30, 2009, Pelham paid $300,000 cash for all assets and liabilities of Sampras, which will cease to exist as a separate entity. In connection with the acquisition, Pelham paid $10,000 in direct combination costs and agreed to pay $50,000 to the former owners of Sampras contingent on meet¬ing certain revenue goals during 2010. Pelham estimated the present value of its probability adjusted expected payment for the contingency at $15,000.

In determining its offer, Pelham noted the following pertaining to Sampras:

• It holds a building with a fair value $40,000 more than its book value.

• It has developed a customer list appraised at $22,000, although it is not recorded in its financial records.

• It has research and development activity in process with an appraised fair value of $30,000.

However, the project has not yet reached technological feasibility and the assets used in the activity have no alternative future use.

• Book values for the receivables, inventory, equipment, and liabilities approximate fair values.

Prepare Pelham's accounting entry to record the combination with Sampras using the

a. Acquisition method.
b. Purchase method.

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Accounting Basics: Probability adjusted expected payment for contingency
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