Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn Company on January 1, 2011, paying $720,000 cash. Senn Company’s December 31, 2010, balance sheet, reflecting both book values and fair values, showed:

As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company $135,000 cash if the postcombination earnings of the combined company

(Pham) reached certain levels during 2011 and 2012.

Required:

A. Record the journal entry on the books of Pham Company to record the acquisition on

January 1, 2011. It is expected that the earnings target is likely to be met.

B. Assuming the earnings contingency is met, prepare the journal entry on Pham Company’s books to settle the contingency on January 2, 2013.

C. Assuming the earnings contingency is not met, prepare the necessary journal entry on Pham Company’s books on January 2, 2013.

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Book Value Fair Value $ 72,000 86,000 110,000 $ 65,000 99,000 162,000 450,000 288,000 Accounts receivable (net) Inventory Land Buildings (net) Equipment (net) 369,000 237,000 $874,000 $ 83,000 180,000 153,000 $1,064,000 $ 83,000 180,000 Total Accounts payable Note payable Common stock, $2 par value Other contributed capital Retained earnings 229,000 229,000 Total $874,000