Question

Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2016, for $830,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $63,000 to equipment and goodwill of $109,200. At the acquisition date, Dosmann also agrees to pay Lizzi’s previous owners an additional $198,000 on January 1, 2018, if Lizzi earns a 10 percent return on the fair value of its assets in 2016 and 2017. Lizzi’s profits exceed this threshold in both years. Which of the following is true?

a. The fair value of the expected contingent payment increases goodwill at the acquisition date.

b. Consolidated goodwill as of January 1, 2018, increases by $198,000.

c. The $198,000 is recorded as an expense in 2018.

d. The additional $198,000 payment is a reduction in consolidated retained earnings.

Answer 1

Solution : The answer for the above quaestion will be option (a)

a) Since the additonal consideratuon is subject to the condition that wether Lizzi Corporation will be able to acheive the target (i.e 10 % return on fair value of assets) , which is not certain. If the Lizzi Corporation not able to to achive the same the addtional consideration is payable to it. it worth remebering that any amount paid above the net worth of corporation will be treated as goodwil. So the additional consideration of $ 198000 will be contingent upon conditiontion and will treated as Goodwill if paid .

b) As already discussed the certainity of payment is conditional, if paid will be cosolidated as goodwill.

c) Since the payment will be capital nature, so it cant be treated as expense

d) The payment will increase the value of the company and will be recorded as gooswill (Assets) instead of reducing form the retained earnings.