Contingent consideration. Grant Company purchased the net assets of Harding Company on January 1, 2015, and made the following entry to record the purchase:
Provide the correct title for the $40,000 credit account above and make the required entry on January 1, 2017, for each of the following independent contingency agreements:
1. An additional cash payment would be made on January 1, 2017, equal to twice the amount by which average annual earnings of the Harding Division exceed $25,000 per year, prior to January 1, 2017. Net income was $50,000 in 2015 and $60,000 in 2016. Assume that the expected value of the agreement on the purchase date was $40,000. Assume that no adjustment was made at the end of 2015 or 2016.
2. Added shares would be issued on January 1, 2017, equal in value to twice the amount by which average annual earnings of the Harding Division exceed $25,000 per year, prior to January 1, 2017. Net income was $50,000 in 2015 and $60,000 in 2016. The market price of the shares on January 1, 2017, was $5. Assume that the expected value of the agreement on the purchase date was $40,000. The agreement is classified as an equity transaction.
3. Added shares or cash (at the option of the acquirer) would be issued on January 1, 2017, to compensate for any fall in the value of Grant common stock below $6 per share. The market price of the shares on January 1, 2017, was $5. Assume that the expected value of the agreement on the purchase date was $40,000 and that it is classified as a liability. Assume that no adjustment was made at the end of 2015 or 2016. Shares were issued on January 1, 2017.