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BuyCo is a privately held technology developer and manufacturer in the transportation

industry. On October $31,20$X$1,$ BuyCo entered into an agreement with SellCo to

purchase certain assets and assume certain liabilities of SellCo $($the $$Transaction$).$

BuyCo intends to incorporate the processes, economic resources, and technology

acquired in the Transaction into its existing business to serve the transportation industry

with energy$-$efficient solutions and provide a return to its shareholders. The assets and

liabilities acquired meet the definition of a business as defined in ASC $805-10,$ Business

Combinations: Overall.

Pursuant to the agreement, BuyCo will transfer to the owners of SellCo cash of

$$2$ million and $10$ million shares of BuyCo common stock. BuyCo will also assume

liabilities of $$4\mathrm{.}5$ million.

The terms of the agreement define the $$liquidity event period$$ as the period beginning at

the closing of the Transaction and ending on December $31,20$X$2.$ If BuyCo undergoes an

IPO during the liquidity event period, and the $10$ million shares received by SellCo in the

Transaction have a fair value of less than $$20$ million, BuyCo would be required to issue

up to $2$ million additional shares of common stock such that the total fair value of shares

held by SellCo equals $$20$ million $($the $$Share Value Commitment$).$ BuyCo would have

sufficient authorized and unissued shares to settle the Share Value Commitment, and

BuyCo would be permitted to settle in unregistered shares. The agreement requires the

Share Value Commitment to be settled in shares and under no conditions will BuyCo be

required to settle the Share Value Commitment in cash. BuyCo has concluded that it is

more likely than not that the number of shares required to settle the Share Value

Commitment will be less than $2$ million.

The Transaction closed on December $31,20$X$1,$ at which time BuyCo legally obtained

control over the purchased assets and assumed liabilities of SellCo. The fair value of

BuyCo common stock was $$1\mathrm{.}85$ per share on October $31,20$X$1,$ $$1\mathrm{.}95$ per share on

December $31,20$X$1,$ and $$1\mathrm{.}90$ per share on June $30,20$X$2.$ BuyCo hired Entity E$,$ a

third$-$party valuation specialist, to determine the fair value of the Share Value

Commitment. On the basis of the current fair value of BuyCo common stock, the

guaranteed value of $$20$ million, the probability of an IPO occurring during the liquidity

event period, and other relevant valuation assumptions, Entity E estimated the fair value

of the Share Value Commitment to be $$1\mathrm{.}4$ million, $$450,000,$ and $$1\mathrm{.}2$ million on

October $31,20$X$1,$ December $31,20$X$1,$ and June $30,20$X$2,$ respectively.

Required:

$1.$ What is the total consideration transferred by BuyCo in the Transaction, and how

should that consideration be measured?

$2.$ How should the Share Value Commitment be reflected on the December $31,$

$20$X$1,$ balance sheet of BuyCo?

$3.$ What journal entries, if any, are required to record the change in fair value for the

Share Value Commitment between December $31,20$X$1,$ and June $30,20$X$2?$

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