Asked by Jason Harris on Jun 21, 2024
Verified
A business combination involves a contingent consideration. It is considered 70% probable that a payment of $500,000 will become payable three years after the acquisition date. Using a 7% discount rate, how much interest expense should be recorded on the liability for the first year after acquisition?
A) $19,999
B) $24,500
C) $28,570
D) $35,000
Contingent Consideration
Additional payment in a business acquisition that depends on specific future events, such as reaching certain performance milestones.
Interest Expense
The cost incurred by an entity for borrowed funds, recognized as a finance expense or interest cost.
Discount Rate
The discount rate applied in the evaluation of discounted cash flow (DCF) to calculate the current worth of future cash flows.
- Assess the management and identification of contingent consideration according to IFRS 3.
Verified Answer
PV = FV / (1 + r)^n
PV = $500,000 / (1 + 0.07)^3
PV = $386,727.47
The interest expense can then be calculated as the change in the present value of the liability between the beginning and end of the year, multiplied by the discount rate.
Interest Expense = (Ending PV - Beginning PV) x Discount Rate
Interest Expense = ($386,727.47 - $500,000) x 7%
Interest Expense = $19,998.50, which rounds to $19,999. Therefore, the answer is A.
Learning Objectives
- Assess the management and identification of contingent consideration according to IFRS 3.
Related questions
Major Corporation Issues 1,000,000 Common Shares for All of the ...
A Business Combination Involves a Contingent Consideration ...
When a Contingent Consideration Arising from a Business Combination Is ...
When a Firm Does Not Adopt the Fair Value Option,it ...
Under IFRS,firms May Elect the Fair Value Option Only in ...