Holt Corporation is contemplating the acquisition of Sambo Companys net assets on December 31, 2015. It is considering making an offer, which would include a cash payout of $225,000 along with giving 15,000 shares of its $2 par value common stock that is currently selling for $20 per share. Holt also agrees that it will pay an additional $50,000 on January 1, 2018, if the average net income of Sambos business unit exceeds $80,000 for 2016 and 2017. The likelihood of reaching that target is estimated to be 60%. The balance sheet of Sambo Company is given below, along with estimated fair values of the net assets to be acquired.

Sambo Company

Balance Sheet

December 31, 2015

Book Value Fair Value Book Value Fair Value

Current assets: Current liabilities:

Notes receivable $ 33,000 $ 33,000 Accounts payable $ 63,000 $ 63,000

Inventory 80,000 80,000 Taxes payable 15,000 15,000

Prepaid expenses 15,000 15,000 Interest payable 3,000 3,000

Total current assets $128,000 $128,000Total current liabilities $ 81,000 $ 81,000

Investments $ 36,000 $ 55,000

Fixed assets: Other liabilities:

Land $ 15,000 $ 90,000

Bonds payable $250,000 $250,000

Buildings 115,000 170,000

Discount on bonds payable (18,000) (30,000)

Equipment 256,000 250,000

Vehicles 32,000 25,000

Total fixed assets $418,000 $535,000

Total other liabilities $232,000 $220,000

Intangibles: Stockholders equity:

Franchise $ 56,000 $ 70,000

Common stock $ 50,000

Paid-in capital in excess of par 200,000

Retained earnings 75,000 Total equity $325,000

Total assets $638,000 $788,000

Total liabilities and equity $638,000

a.) Do value analysis and prepare the entry on the books of Holt Corporation to record the acquisition of Sambo Company?

b.)Assume that the net income of the Sambo business unit is $120,000 for 2016. As a result, the likelihood of paying the contingent consideration is believed to be 90%. What, if any, adjusting entry is required as of December 31, 2016?

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