Question

On July 1, 2009, Lazer, Inc. acquired all of the assets, with a fair value of $400,000, and liabilities, with a fair value of $150,000, of Tipco, Inc. for $250,000 cash. In addition, Lazer paid $20,000 in legal and accounting fees for the combination and expects to pay $50,000 to close one of Tipco's plants and relocate its employees. Which one of the following is the amount of liability that Lazer should recognize in recording the business combination?

A. $- 0 - (no liability)
B. $150,000
C. $170,000
D. $200,000

Answer 1

Lazer should recognize a liability of $150,000, which is the fair value of the liabilities acquired from Tipco, Inc. Costs for legal fees and relocating employees are not considered as liabilities in this context. The correct option is B.

Step-by-step explanation:

The amount of liability that Lazer should recognize in recording the business combination is $150,000. When acquiring assets and liabilities of another company, the liabilities to be recognized on the balance sheet are typically those that have been assumed in the transaction. In this case, Lazer, Inc. acquired liabilities with a fair value of $150,000 from Tipco, Inc.

The additional costs of $20,000 in legal and accounting fees and the expected $50,000 for closing a plant and relocating employees are not liabilities assumed from Tipco, but rather costs associated with the combination process and future restructuring activities respectively. Therefore, those additional costs are not considered when calculating the liabilities to be recognized in regards to the business combination as they do not constitute a present obligation as a result of past events. The correct answer is option B, which is $150,000.