P Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all the outstanding common stock of S Company in a business combination properly accounted for as an acquisition. The fair value of S Company's net assets on that date was $220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a fair value of $50,000 to the former stockholders of S Company as an earnings contingency. Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares to be issued should be treated as a(n):
A) decrease in noncurrent liabilities of S Company that were assumed by P Company.
B) decrease in consolidated retained earnings.
C) increase in consolidated goodwill.
D) decrease in consolidated other contributed capital.

Question

Quizplus · Accepted Answer

The $50,000 fair value of the additional shares to be issued as an earnings contingency should be treated as an increase in consolidated goodwill. This is because the additional shares represent part of the consideration transferred by P Company to acquire S Company, and any contingent consideration expected to be issued in a business combination is included in the calculation of goodwill at the acquisition date.

P Corporation Issued 10,000 Shares of Common Stock with a Fair