The following note appears in the financial statements of Best Company for the period ending December 31, Year 1:
Event subsequent to December 31, Year 1: In January Year 2, Best Company acquired Good Products, Inc., and its affiliates by the issuance of 48,063 shares of common stock. Net assets of the combined companies amount to $1,016,198, and net income for Year 1 is $150,000. To the extent the acquired companies earn in excess of $1,000,000 over the next five years, Best Company is required to issue additional shares not to exceed 151,500, and limited to a market value of $2,000,000.
a. Explain whether this disclosure is necessary and adequate.
b. If Good Products, Inc., is acquired in December Year 1, at what price does Best Company record this acquisition? Best Company’s shares traded at $22 on the acquisition date.
c. Explain the contingency for additional consideration.
d. If the contingency materializes to the maximum limit, how does Best Company record this investment?