Contingent Consideration: Existing Security Price to Be Maintained Palco Inc. acquired 100% of Salco Inc.’s outstanding common stock by issuing 80,000 shares of its common stock ($10 par value), which had a market value of $40 per share at the acquisition date. If the market value of Palco’s common stock falls below $40 per share two years after the acquisition date, Palco must issue additional shares at that time to Salco’s former shareholders so that the total value of the shares issued equals $3,200,000.

Required Note: You may want to review paragraphs 29 and 30 of FAS 141 before solving.

1. Prepare the entry to record the business combination. Explain the accounting treatment of the contingent consideration.

2. Assume that the market value of Palco’s common stock is $32 per share two years later. Prepare the entry to record the additional shares issued.