Dosmann, Inc. bought all outstanding shares of Lizzi Corporation on January 1, 2

Question

Dosmann, Inc. bought all outstanding shares of Lizzi Corporation on January 1, 2013 for $700,000 in cash. This port of the consideration transferred results in a fair value allocation of $35,000 to equipment and goodwill of $88,000. At the acquisition date Dosmann also agrees to pay Lizzi's previous owners an additional $110,000 on January 1, 2015 if Lizzi earns a 10 percent return on the fair value of its assets in 2013 and 2014.  Lizzi's profits exceed this threshold in both years. Which of the following is true?

A. The $110,000 is recorded as an expense in 2015.

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

C. Consolidated goodwill as of January 1, 2015 increases by $110,000.

D. The additional $110,000 payment is a reduction in consolidated retained earnings.

A. The $110,000 is recorded as an expense in 2015.

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

C. Consolidated goodwill as of January 1, 2015 increases by $110,000.

D. The additional $110,000 payment is a reduction in consolidated retained earnings.

Explanation / Answer

The additional $110,000 payment is a reduction in consolidated retained earnings.

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