Question

Assume the same information as in Exercise 2‐5 except that instead of paying a cash earnout, Pritano Company agreed to issue 10,000 additional shares of its $10 par value common stock to the stockholders of Succo if the average postcombination earnings over the next three years equaled or exceeded $2,500,000. The fair value of the contingent consideration on the date of acquisition was estimated to be $200,000. The contingent consideration (earnout) was classified as equity rather than as a liability.

	Book value	Fair value
Current assets	$ 960,000	$ 960,000
Plant and equipment	1,080,000	1,440,000
Total	$2,040,000	$2,400,000
Liabilities	$ 180,000	$ 216,000
Common stock	480,000
Other contributed capital	600,000
Retained earnings	780,000
Total	$2,040,000

Answer 1

Solution:-

Part A	Current Assets	960,000
	Plant and Equipment	1,440,000
	Goodwill	176,000
	Liabilities		216,000
	Cash		2,160,000
	Liability for Contingent Consideration		200,000
Part B	Liability for Contingent Consideration	200,000
	Common Stock ($10 — 10,000)		100,000
	Paid in Capital - Common Stock		100,000

Platz Company does not adjust the original amount recorded as equity.