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Exercise 8 (LO 4) Contingent consideration. Gull Company purchased the net assets of Hart Company on January 1, 20X1, and made the following entry to record the purchase:
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Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
100,000 |
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Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
150,000 |
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Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
50,000 |
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Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
300,000 |
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Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
100,000 |
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Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
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80,000 |
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Common Stock ($1 par). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
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100,000 |
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Paid-In Capital in Excess of Par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
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520,000 |
Make the required entry on January 1, 20X3, for each of the following independent contin- gency agreements:
1. An additional cash payment would be made on January 1, 20X3, equal to twice the amount by which average annual earnings of the Hart Division exceed $25,000 per year, prior to
January 1, 20X3. Net income was $50,000 in 20X1 and $60,000 in 20X2. Assume that the liabilities recorded on January 1, 20X1, include an estimated contingent liability recorded at an estimated amount of $40,000.
2. Added shares would be issued on January 1, 20X3, equal in value to twice the amount by which average annual earnings of the Hart Division exceed $25,000 per year, prior to Janu- ary 1, 20X3. Net income was $50,000 in 20X1 and $60,000 in 20X2. The market price of the shares on January 1, 20X3, was $5.
3. Added shares would be issued on January 1, 20X3, to compensate for any fall in the value of Gull common stock below $6 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1, 20X3. The market price of the shares on January 1, 20X3, was $4.