ACCA FR · Chapter 12 · Question 4 of 13
Lynx Co bought a subsidiary for: cash of $4,000,000 paid on acquisition; a further $3,000,000 payable two years after acquisition; and contingent consideration payable if profit targets are met, with an acquisition-date fair value of $500,000. Lynx Co's cost of capital is 10% a year. What is the total consideration for the goodwill calculation? (Use unrounded discount factors and round your final answer to the nearest dollar.)
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) $6,979,339
Explanation
Deferred consideration is measured at present value: $3,000,000 / 1.10^2 = $2,479,339 (unrounded discount factor, answer rounded to the nearest dollar). Contingent consideration is included at its acquisition-date fair value of $500,000, whether or not payment is probable. Total = $4,000,000 + $2,479,339 + $500,000 = $6,979,339.
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