Hite Corporation is contemplating the acquisition of Smith Company’s net assets on December 31 2011. It is considering making an offer, which would include a cash payout of $200,000 along with giving

Hite Corporation is contemplating the acquisition of Smith Company’s net assets on December 31 2011. It is considering making an offer, which would include a cash payout of $200,000 along with giving 15,000 shares of its $2 par value common stock that is currently selling for $20 per share. Hite also agrees that it will pay an additional $50,000 on January 1, 2014, if the average net income of Smith’ s business unit exceeds $80,000 for 2012 and 2013. The likelihood of reaching that target is estimated to be 75%. The balance sheet of Smith Company as of December 31, 2011 is given below, along with estimated fair values of net assets to be acquired.

Book Value Fair Value

Current Assets:

Notes receivable $33,000. $33,000

Inventory $89,000 $80,000

Prepaid expenses $15,000 $15,000

Investments $36,000 $55,000

Fixed Assets:

Land $15,000 $90,000

Buildings $115,000 $170,000

Equipment $256,000 $250,000

Vehicles $32,000 $25,000

Intangibles:

Franchise $56,000 $70,000

Total Assets $647,000 $788,000

Book value Fair value

Current liabilities:

Acvounts payable $63,000 $63,000

Taxes payable $15,000 $15,000

Interest payable $3,000 $3,000

Other liabilities:

Bonds payable $250,000 $250,000

Disct on bonds payable ($18,000)($30,000)

Stockholders equity:

Common stock $50,000

Paid-in-capital in $200,000 excess of par

retained earnings $84,000

Total L& E $647,000

Do value analysis prepare the entry on the books of Hite Corporation to record the acquisition of Smith Company.

Assume that the net income of the Smith business unit is $120,000 for 2012. 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, 2012?

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