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Pamela acquired 80% of the share capital of Samantha on 1 January 20X1. Part of the purchase consideration was $200,000 cash to be paid on 1 January 20X4. The applicable cost of capital is 10 %.
What will the deferred consideration liability be at 31 December 20X2?
Sir can you please explain the solution? What they did was simply 200000/1.1 = 181 818. I’m confused as to why they did this. Thank you!
Hi,
They are calculating the present value of the consideration. They are making a payment of $200,000 on 1 January 20X4 and we need the value of the liability on 31 December 20X2. We need to discount the $200,000 by one year, given the dates.
If the discount rate is 10% (=0.1) then the present value is calculated by dividing the $200,000 by 1 plus the discount rate of 0.1, hence the 200,000/1.1
Thanks
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