Problem

Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2011, for...

Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2011, for $700,000 in cash. This portion 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 1,2013, if Lizzi earns a 10 percent return on the fair value of its assets in 2011 and 2012. Lizzi’s profits exceed this threshold in both years. Which of the following is true?

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

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

c. Consolidated goodwill as of January 1,2013, increases by $110,000.

d. The $110,000 is recorded as an expense in 2013.

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