Miller Inc. acquires 100% of the voting stock of MKE Company on January 1, 2016
ID: 2516701 • Letter: M
Question
Miller Inc. acquires 100% of the voting stock of MKE Company on January 1, 2016 for $900,000 cash. A contingent payment of $100,000 will be paid on January 1, 2017 if MKE generates cash flows from operations of $100,000 or more in fiscal year 2016. Miller Inc. estimates that there is a 80% probability that MKE Co. will generate at least $100,000 cash flow from operations in 2016 and uses an interest rate of 4% to incorporate the time value of money (1÷[1+.04]).
What is the amount of the contingency payment Miller Inc. would record under GAAP related to its acquisition of MKE Company? What is the journal entry at 1/1/2016 Miller Inc. would record for its acquisition of MKE Company?
Assume MKE Co. achieves $100,000 cash flows from operations in 2016. What Journal Entry would Miller Inc. record in 2017 to reflect this? d. The amount of contingency obligation you determined in "b." above is -
When will Miller Inc. Corp pay the amount shown above to MKE Company?
On January 1, 2017
No later than January 1, 2017
On December 31, 2016
On December 1, 2016
Never
Explanation / Answer
What is the amount of the contingency payment Miller Inc. would record under GAAP related to its acquisition of MKE Company?
As per US Gaap contingency payment will be recognized when:
It is probable that payment will be made
Amount of Liability can be reasonably measured.
So in present case Contingency of $ 100,000 will be created as it satisfies both the condition.
What is the journal entry at 1/1/2016 Miller Inc. would record for its acquisition of MKE Company?
Dr. Investment in MKE Company - $900,000
To Bank $ 900,000
(Being 100% Stake purchased in MKE Company)
When will Miller Inc. Corp pay the amount shown above to MKE Company?
As per Question, it has to be paid Not later than January 1, 2017