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Consolidation of Non-Wholly Owned Subsidiaries-- Modern Advanced Accounting in Canada

Problem 4-15 LO5 Calof Inc. acquires 100% of the common shares of u Company on January 1, Year 4 for the following consideration: 5,000 market value of 5,000 shares of its common shares A contingent payment of $40,000 cash on January 1, Year 5 if Xiuu generates cash flows from operations of $10,000 or more in Year 4. Apayment of sufficient shares of Calof common shares to ensure a total value of $275,000 if the price per share is less than $55 on January 1, Year 5. For the cash contingency, Calof estimates that there is a 30% chance that the $40,000 payment will be required. For the share contingency, Calof estimates that there is a 20% probability that the 5,000 shares issued will have a market value of $270,000 on January 1, Year 5, and an 80% probability that the market value of the 5,000 shares will exceed $275,000. Calof uses an interest rate of 4% to incor- porate the time value of money. In Year 4, Xiyu exceeds the cash flow from operations threshold of$10,000, thus requiring an addi tional payment of $40,000. Also, Calof's stock price had fallen to $54.46 at January 1, Year 5. Because the acquisition agreement called for a $275,000 total value at January 1, Year 5, Calof must issue an additional 50 shares ($2,700 shortfalls54.46 per share) to the former owners ofXiyu

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