Contingent Consideration

As part of its acquisition of Broadvision Inc., Aircastle Corporation enters into the following agreements:

1. After four years, Aircastle will pay the former shareholders of Broadvision an amount equal to 25% of the amount by which Broadvisions total EBITDA over the four years exceeds $100 million. This payment will be made in cash. Aircastle has the following expectations regarding Broadvisions total EBITDA over the next four years:

EBITDA	Probability
$60 million	20%
90 million	10%
120 million	55%
150 million	15%

2. Several of Broadvisions former shareholders have valuable expertise and will remain as employees with Aircastle. After the first year following the acquisition, Aircastle will pay these shareholders $5 million as incentive compensation. Of this amount, $1 million is an incentive to persuade the shareholders to agree to the merger, and $4 million relates to services to be provided after the acquisition.

Required

a. Compute the amount of contingent consideration Aircastle reports as a liability at the date of acquisition. Assume that the appropriate risk-adjusted discount rate for agreement 1. is 20%, and for agreement 2. it is 5%.

Round your answer to the nearest million.

$Answer

million

b. Assume Aircastle reported $20 million in goodwill on its acquisition of Broadvision. Assume the fair value of the earnout in agreement 1. declines by $0.5 million during the first year following the acquisition. Prepare the journal entry made by Aircastle to record the value change, assuming

(1) The value change reflects conditions as of the date of acquisition, which Aircastle discovered subsequent to the acquisition.

(2) The value change reflects changes in market conditions occurring subsequent to the acquisition.

Enter answers in millions.

Ref.	Description		Debit	Credit
(1)	AnswerEarnout liabilityGain on earnoutGoodwillLoss on earnout		Answer	Answer
	AnswerEarnout liabilityGain on earnoutGoodwillLoss on earnout		Answer	Answer
(2)	AnswerEarnout liabilityGain on earnoutGoodwillLoss on earnout		Answer	Answer
	AnswerEarnout liabilityGain on earnoutGoodwillLoss on earnout		Answer