As part of the acquisition agreement, Parma Corporation agrees to pay the former shareholders of Stow Company $0.40 in cash for every dollar of gross revenues above $4,500,000 reported at the end of the first year following acquisition. Parma projects the following gross revenues outcomes for the year:
|
Gross revenues
|
Probability
|
|
$3,500,000
|
0.05
|
|
4,500,000
|
0.30
|
|
5,500,000
|
0.20
|
|
6,500,000
|
0.25
|
|
7,500,000
|
0.20
|
Using a 6 percent discount rate, what is the appropriate value to be reported as an earnings contingency liability on Parma's books at the date of acquisition?