Pretenders Corp. purchased 100% of Singapore Corp. on January 1, 2021 for the following consideration: $1,500,000 of
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Question:
Pretenders Corp. purchased 100% of Singapore Corp. on January 1, 2021 for the following consideration:
- $1,500,000 of cash
- 100,000 Pretenders Corp. shares. Each of these shares were estimated to have a fair value of $10.
- $5,000,000 note payable with a 3% coupon rate. The note payable and interest is due December 31,
- 2021.
- An additional $750,000 of cash if certain income targets are met in 2021 and 2022. If the income targets
- are met, the additional payout will be made on December 31, 2022. Pretenders Corp. believes there is a 60% chance this payout will have to be made.
- Pretenders Corp. has a market borrowing interest rate of 10%.
Can you solve these:
A) Calculate the purchase price of the acquisition of Singapore Corp. as at January 1, 2021.
B)
- I)Which of the above consideration would qualify as contingent consideration?
- II)Would the contingent consideration be recorded as liability or equity on the date of the acquisition?
- III)Please explain the difference on how you account for contingent consideration that qualifies as a
- liability, compared to contingent consideration that qualifies as equity after the date of the acquisition.
C) As at December 31, 2021, Pretender Corp. believes that the probability of payout of the $750,000 of cash has decreased to a 40% chance. Please provide the journal entry that would need to be recorded on December 31, 2021.
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