As part of its acquisition of Broadvision Inc., Aircastle Corporation enters into the following agreements: 1. After four years, Aircastle will pay the former shareholders of Broadvision an amount equal to 25% of the amount by which Broadvision’s total EBITDA over the four years exceeds $100 million. This payment will be made in cash. Aircastle has the following expectations regarding Broadvision’s total EBITDA over the next four years:

EBITDA Probability
$60 million 20%
90 million 10%
120 million 55%
150 million 15%

2. Several of Broadvision’s former shareholders have valuable expertise and will remain as employees with Aircastle. After the first year following the acquisition, Aircastle will pay these shareholders $5 million as incentive compensation. Of this amount, $1 million is an incentive to persuade the shareholders to agree to the merger, and $4 million relates to services to be provided after the acquisition.

Required
a. Compute the amount of contingent consideration Aircastle reports as a liability at the date of acquisition. Assume that the appropriate risk-adjusted discount rate for agreement 1 is 20%, and for agreement 2 it is 5%.
b. Assume Aircastle reported $20 million in goodwill on its acquisition of Broadvision. Assume the fair value of the earnout in agreement 1. declines by $0.5 million during the first year following the acquisition. Prepare the journal entry made by Aircastle to record the value change, assuming

1. The value change reflects conditions as of the date of acquisition, which Aircastle discovered subsequent to the acquisition.
2. The value change reflects changes in market conditions occurring subsequent to the acquisition.