Question

In recording its acquisition of Lambda, Inc., Omega, Inc. properly recognized a contingent consideration liability of $28,000 associated with a possible payment based on a target amount of post-combination cash flow from operations. Shortly after the combination, but during the measurement period, the national economy experienced a significant downturn which made it unlikely that the target amount would be reached. As a consequence, at the end of Omega's fiscal period, the liability was properly revalued to a fair value of $9,000. Which one of the following is the amount of gain or loss that will be recognized in income as a result of the reevaluation of the contingent liability?
A. $ - 0 - (no gain or loss).
B. $19,000 gain.
C. $19,000 loss
D. $ 9,000 loss

Answer 1

Answer:

A) $ - 0 - (no gain or loss).

Explanation:

Answer 2

Answer:

B) $19,000 gain

Explanation:

Given:

Revalued fair value = $9,000

Contigent liability = $28,000

Therefore, at fair value, contigent consideration liabilities are first recognized and they are subsequently made to reach fair value each period until expiry. Gain and loss will be determined when there is a move in fair value which arises from happenings after date acquired.

In this case, at end of fiascal period, the liability was revalued to $9,000

The amount of gain or loss that will be recognized in income as a result of the reevaluation of the contingent liability will be:

$28,000 - $9,000 =$19,000 Therefore a $19,000 gain will be recognized as a result of the reevaluation of contingent liability