The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent consideration

would be:

*insert table

Illustration 1-7: Stock Contingency based on Future Performance – Earnings with Market Value of
Stock Given

Assuming the same information in illustration 1-2, in addition to the stock issue, Peter Corporation also
agreed to issue additional shares of common stock to the former stockholders of Saul Corporation if the
average post-combination earnings over the next two years (i.e.,20x5 and 20x6) equaled or exceeded
P390,000. The additional 1,000 shares expected to be issue are valued at P15,000.

The amount of goodwill on acquisition will be recomputed as follows:

*insert table

The journal entries by Peter Corporation to record the acquisition are as follows:

*insert table

On January 1, 20x7, the target is met or contingent event happens, i.e., average post-combination
earnings over the next two years amounted to P410,000. Thus, Peter Corporation will make the
following entry for the issuance of 1,000 additional shares:

*insert table

In case, that there was failure of meeting the contingent event, then, the account “Paid-in capital for
Contingent Consideration” will be closed to account, “Paid-in capital from not meeting the contingent
event:

Illustration 1-8: Stock Contingency based on Future Performance-Earnings

Assuming the same information in illustration 1-2, in addition to the stock issue, Peter Corporation
agreed to issue 5,000 additional shares if the average income during the two (2) year period of 20x5-
20x6 exceed P80,000 per year.

Thus, the above transaction requires the same entry with illustration 1-2 on December 31, 20x4. Prior to
the termination of the contingency, it would be described in a footnote.

On January 1, 20x7, the average income amounted to P110,000 (the contingent event occurs). Thus, the
entry record the occurrence of such event to reassign the P625,000 original consideration to 30,000
shares (25,000 original shares issued + 5,000 additional shares due to contingency) would be:

*insert table

Illustration 1-9: Stock Contingency based on Future Stock Prices

Assuming the same information in illustration 1-2, in addition to the stock issue, Peter Corporation
agreed to issue 5,000 additional shares if two years of two years later, the fair value of acquirer fell
below P25 per share.

Thus, the above transaction requires the same entry with illustration 1-2 on December 31, 20x4. Prior to
the termination of the contingency, it would be described in a footnote.

On January 1, 20x7, the contingent event happens and the stock had a fair value below P25. Thus, the
entry record the occurrence of such event to reassign the P625,000 original consideration to 30,000
shares (25,000 original shares issued + 5,000 additional shares due to contingency) would be:

*insert table

Illustration 1-10: Stock Contingency based on Future Performance-Earnings

Assuming the same information in illustration 1-2, in addition to the stock issue, Peter Corporation
agreed to issue additional shares on January 1, 20x7, equal in value to twice the amount which average
annual earnings of the Saul Corporation exceed P25,000 per year, prior to January 1, 20x7. Net income
was P65,000 in 20x5 and P70,000 in 20x6.
Thus, the above transaction requires the same entry with illustration 1-2 on December 31, 20x4. Prior to
the termination of the contingency, it would be described in a footnote.

On January 1, 20x7, the contingent event happens since the average annual earnings for 20x5 and P20x6
is in excess of P25,000 and stock had a fair value P20 per share. Thus, the entry record the occurrence of
such event to reassign the P625,000 original consideration to 29,450 shares (25,000 original shares
issued + 4,250* additional shares due to contingency) would be:

*insert table

Illustration 1-11: Stock Contingency based on Future Stock Prices

Assuming the same information in illustration 1-2 in addition to the stock issue, Peter Corporation
agreed to issue additional shares on January 1, 20x7, to compensate for any fall in the value of Peter
common stock below P25 per share. The settlement would be to cure the deficiency by issuing added
shares based in their fair value on January 1, 20x7. The market price of the shares on January 1, 20x7,
was P20.

Thus, the above transaction requires the same entry with illustration 1-2 on December 31, 20x4. Prior to
the termination of the contingency, it would be described in a footnote. On January 1, 20x7, the
contingent event happens since the fair value per share fall below P25. Thus, the entry record the
occurrence of such event to reassign the P625,000 original consideration to 31,250 shares (25,000
original shares issued + 6,250* additional shares due to contingency) would be:

*insert table

Illustration 1-12: Stock Contingency with Present Value based on Future Stock Prices

Assuming the same information in illustration 1-2, in addition to the stock issue, Peter Corporation
agreed to issue sufficient shares of Peter Corporation common stock to ensure a total value of P625,000
if the fair value per share is less than P25 on December 31, 20x5.

Peter estimate that there is a 40-percent probability that the 25,000 shares issued will have a market
value of P425,000 on December 31, 20x5, and a 60-percent probability that the market value of the
25,000 shares will exceed P625,000. Peter uses an interest rate of 4 percent to incorporate the time
value of money. The amount of goodwill on acquisition will be recomputed as follows:

*insert table

The journal entries by Peter Corporation to record the acquisition are as follows:

*insert table

On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to P20, thus
requiring Peter to issue additional shares of stock to the former owners of Saul Corporation. The entry
for Peter Corporation on December 31, 20x5 to record such occurrence to reassign the P625,000 original
consideration to 31,250 shares (25,000 original shares issued + 6,250* additional shares due to
contingency) would be:

*insert table

In illustration 1-8 to illustration 1-13, it should be observed that if the contingent consideration is in the
form of equity, the acquirer does not remeasure the fair value of the contingency at each reporting date
until the contingency is resolved.

Illustration 1-13: Contingency Based on Outcome of a Lawsuit

Assume that Poor Corporation acquires Standard Corporation on December 31, 20x4, for cash plus
contingent consideration depending on the assessment of a lawsuit against Standard Corporation
assumed by Poor Corporation.

The initial provisional assessment includes an estimated liability for the lawsuit of P50,000, an estimated
liability for contingent consideration to the shareholders of P5,000, and goodwill of P66,000. The
acquisition contract specifies the following conditions:

 So long as the lawsuit is settled for less than P100,000, Standard Corporation shareholders will
receive some additional consideration. If the lawsuit results in a settlement of P100,000 or
more, then Standard Corporation shareholders will receive no additional consideration; and
  If the settlement is resolved with a smaller (larger) outlay than anticipated (P50,000), the
shareholders of Standard Corporation will receive additional (reduced) consideration
accordingly, thus adjusting the contingent liability above or below P5,000.

On September 1, 20x5, new information reveals:

 The estimated liability for the lawsuit to be P55,000, and

The entry by Poor Corporation on September 1, 20x5 that completed the initial recording of the business
combination would be:

*insert table

The adjustments affect goodwill because the new information was:

a. Obtained during the measurement period (seven months later), and

Illustration 1-4: Bargain Purchase Gain

The trial balance below presents the financial position of Sierra Company on January 1, 20x4:

*insert table

Sierra Company included in the notes to its accounts a contingent liability to a guarantee for a loan.
Although a present obligation existed, a liability was not recognized by Sierra Company because of the
difficulty of measuring the ultimate amount to be paid.

On this date, the business of Sierra Company is acquired by Parrot Company with Sierra Company going
into liquidation. The terms of the acquisition are as follows:

a. Parrot Company is to take over the assets and assumed the liabilities of Sierra Company.
b. Parrot pays P1,500,000 in cash to the previous shareholders of Sierra Corporation.
c. Parrot Company issued 100,000 common shares at P10 par with a fair value of P12.
d. Costs a liquidation of P10,000 are to be paid by Sierra Company with funds supplied by Parrot
Company.
e. Supply of a patent relating to the manufacturing business of Parrot Company. This has a fair
value of P200,000 but has not been recognized in the records of Parrot Company because it
resulted from an internally generated research project.
f. The contingent liability relating to the guarantee was considered to have a fair value at P10,000.
g. Parrot Company was obligated to pay an additional P12,000 to the vendors of Sierra Company is
Sierra Company maintained existing profitability over the subsequent two years from January 1,
20x4 (i.e., January 1, 20x4 to December 31, 20x5). It was highly likely that Sierra Company would
achieve this expectation and the fair value of the contingent consideration was assessed at its
expected value of P12,000.

Parrot Company assess the fair values of the identifiable assets and liabilities of Sierra Company to be as
follows:

*insert table