Calculate the purchase price of the acquisition

Reference no: EM132972672

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.

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.

Reference no: EM132972672

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