Pcost Company purchased 85% of the common stock of Scost Company on April 1, Year 1. The fair value of the consideration transferred consisted of a cash payment of $554,250 and contingent consideration as described in the earnout agreement below. Under the agreement, Pcost Company agrees to pay an earn-out (contingent consideration) to the stockholders of Scost as part of the consideration for their shares. The Company has the option of paying any earn-out in cash and/or shares of its common stock and has estimated the fair value of the contingent consideration to be $52,310. Acquisition-related costs of $19,600 are included in other expenses. Scost will become a reportable segment for consolidated purposes. No control premium was included in the offer price. Both companies have a December 31 year-end. Trial balances for Pcost and Scost on April 1, Year 1 were:

April 1, Year 1 were:

		At April 1, Year 1
		Pcost		Scost
Cash		$28,300		$10,900
Accounts Receivables		125,900		121,300
Inventory		224,700		115,100
Treasury Stock at Cost, 500 Shares		0		48,400
Investment in Scost Company		606,560		0
Property and Equipment (net)		838,900		469,600
Cost of Goods Sold		389,400		191,800
Selling, General, & Administration		79,800		39,300
Other Expenses		23,700		22,800
Dividends Declared		0		0
Total		$2,317,260		$1,019,200
Accounts Payable		$217,000		$158,700
Contingent Consideration		52,310
Dividends Payable		0		0
Common Stock, $5 par value		267,800		40,000
Other Contributed Capital		882,300		252,000
Retained Earnings, 1/1		360,300		236,700
Sales		537,550		331,800
Dividend Income		0		0
Total		$2,317,260		$1,019,200

On the acquisition date, the book values and fair values of Scosts assets and liabilities were equal with the following exceptions.

		Book Value		Fair Value
Inventory		115,100		144,600
Property and Equipment		469,600		511,900

The increase in Property and Equipment will be depreciated over seven years. All fair value estimates will be considered final (no measurement period adjustments). Earnout (Contingent Consideration) AgreementPcost and Scost Company April 1, Year 1 The agreed-upon earn-out has three components. If the yearly revenue of Scost exceeds a target level at the end of years 1, 2, and 3, Pcost will pay the shareholders of Scost an amount equal to 50% of the excess, up to $84,300 per year for a maximum earn out payment of $252,900 in total.

The initial target revenue level for year 1 is $1,290,000 and increases in amount by 5% per year. Target levels in years 2 and 3 will be $1,354,500 and $1,422,225. Pcost estimates the fair value of the earn-out using the present value of expected payments and its incremental borrowing rate adjusted for risk of 20%. The fair value of the three earn-outs was estimated to be $52,310 on the date of acquisition, computed as follows: Fair Value of Contingent Consideration

		Year 1		Year 2		Year 3		Total
Estimated Revenues of Scost		$1,290,000		$1,404,000		$1,539,425
Target level Revenues		1,290,000		1,354,500		1,422,225
Estimated excess		0		49,500		117,200
Reduced by 50%		0.50		0.50		0.50
Potential payout		0		24,750		58,600
Present value factor		0.876		0.719		0.589
Fair value of earn-out		0		17,795		34,515		$52,310

Changes in fair value and interest charges are included in other expense (income) on the income statement.