Pamela acquired 80% of the share capital of Samantha on 1 January 20X1. Part of thepurchase consideration was $200,000 cash to be paid on 1 January 20X4. The applicable costof capital is 10%.What will the deferred consideration liability be at 31 December 20X2?
Question
Pamela acquired 80% of the share capital of Samantha on 1 January 20X1. Part of thepurchase consideration was $200,000 cash to be paid on 1 January 20X4. The applicable costof capital is 10%.What will the deferred consideration liability be at 31 December 20X2?
Solution
The deferred consideration liability is the present value of the future payment that Pamela owes. This is calculated using the formula for the present value of a single sum, which is:
PV = FV / (1 + r)^n
Where:
- PV is the present value
- FV is the future value
- r is the discount rate
- n is the number of periods
In this case:
- FV is $200,000 (the future payment)
- r is 10% (the cost of capital)
- n is 2 (the number of years from 31 December 20X2 to 1 January 20X4)
So the calculation is:
PV = 200,000 / 1.21 PV = $165,289.26
So, the deferred consideration liability at 31 December 20X2 would be $165,289.26.
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