1. A Company acquired a 100% interest in the equity capital of STB Ltd. on January 1, 2020. On this date, the fair value of the identifiable net assets of STB is P500 thousand. The consideration is agreed at P800 thousand, and this is based on the capitalization of a P300,000 maintainable profit of STB. The terms of payment are as follows:

a. P500 thousand upfront when control is passed to the company;

b. P300 thousand at the end of the first year, if the profit of STB is at least P300,000 for the first year after the acquisition and

c. In the event that the profit level is below P300,000, the amount payable is reduced accordingly by the shortfall multiplied by a factor of 2.

d. There is no significant financing cost.

2. The December 31 year-end financial statements of SBT Ltd. provided for a P350 thousand net income, however during its year-end audit, the following errors were discovered:

	Dec. 31, 2019	Dec. 31, 2020
Ending inventory	P48,000 understated	P40,500 overstated
Depreciation expense	P11,500 understated	-

An insurance premium of P330,000 was prepaid in 2019 covering the years 2019, 2020, and 2021. The entire amount was charged to expenses in 2019. In addition, on December 31, 2020, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded until 2021. There were no other errors during 2019 and 2020, and no corrections have been made for any of the errors. Ignore income tax effects.

Required:
Determine whether or not there should be a recalculation of the fair value of the contingent consideration at the end of year 1. Provide supporting computations. If there’s a need to recalculate, show the measurement period adjustments to the cost of combination and the revised goodwill on the combination.

Answer rating: 100% (QA)

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