Parent Company agrees to pay $30 million in cash to the five former owners of Sub, Inc., for all of its assets and liabilities. The five owners of Sub developed and patented a technology for that could be integrated into Parents existing products. Parent plans to combine the new technology with its existing products and projects a substantial revenue increase as a result. As part of the acquisition, Parent also agrees to pay additional amounts to the former owners upon achievement of certain financial goals. Parent will pay $10 million to the five former owners of Sub if revenues from the combined system exceed $200 million over the next three years. Parent estimates this contingent payment to have a probability-adjusted present value of $5 million. The five former owners have also been offered employment contracts with Parent to help with technology integration and performance issues. The employment contracts are silent as to service periods, have salaries like those of equivalent employees, and specify a profit-sharing component over the next three years (if they remain with the company) that Parent estimates to have a current fair value of $2 million. The five former owners of Sub say they will stay on as employees of Parent for at least three years to help achieve the desired financial goals. Should Parent account for the contingent payment promised to the former owners of Sub as consideration transferred in the acquisition or as compensation expense to employees? Ultimately the question is whether it is asset or expense. Note: The two components (payment in paragraph two and profit-sharing in paragraph three) may result in different treatments.

What would be the effect on Parents financial statement of recording the payment(s) improperly?

Who are the stakeholders, and what does each have at stake?

How would you record this journal entry transaction?