Cash Acquisition, Contingent Consideration

Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on January 1, 2011, paying $720,000 cash. Senn Company”s December 31, 2010, balance sheet, reflecting both book values and fair values, showed:

Book Value

Fair Value

Accounts receivable (net)

$ 72,000

$65,000

Inventory

86,000

99,000

Land

110,000

162,000

Buildings (net)

369,000

450,000

Equipment (net)

237,000

288,000

Total

$874,000

$1,064,000

Accounts payable

$ 83,000

$83,000

Note payable

180,000

180,000

Common stock, $2 par value

153,000

Other contributed capital

229,000

Retained earnings

229,000

Total

$874,000

As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company $135,000 cash if the post combination earnings of the combined company (Pham) reached certain levels during 2011 and 2012.

Required:

Record the journal entry on the books of Pham Company to record the acquisition on January 1, 2011. It is expected that the earnings target is likely to be met.
Assuming the earnings contingency is met, prepare the journal entry on Pham Company”s books to settle the contingency on January 2, 2013.
Assuming the earnings contingency is not met, prepare the necessary journal entry on Pham Company”s books on January 2, 2013.

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