On January 1, 2013, P Company acquired all the net assets of S Company for $1,000,000 cash and the fair value of assets $2,500,000 while the fair value of the liabilities is $1,000,000. On February 2013, P Company also agreed to issue additional 10,000 shares of common stock to the former stockholders of S Company if the average post-combination earnings over the next two years equal or exceeded $800,000. Based on the information available at the acquisition date, the par value of P company common stock is $10 while the market value is $20.

Required:

1. Prepare the journal entry necessary for P Company to record the contingent liability on February 1, 2013.

2. Assuming that the condition is met, but the stock market price has increased from $20 per share to $25 per share at the time of issuance, Prepare the journal entry necessary for P Company.

3. Assuming that the condition is not met. Prepare the journal entry necessary for P Company.