Question

On May 1, Donovan Company reported the following account balances: Current assets $ 131,000 Buildings & equipment (net) 249,500 Total assets $ 380,500 Liabilities $ 122,500 Common stock 150,000 Retained earnings 108,000 Total liabilities and equities $ 380,500 On May 1, Beasley paid $422,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $21,300 in accounts payable for legal and accounting fees. Beasley also agreed to pay $83,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $21,500. In determining its offer, Beasley noted the following: Donovan holds a building with a fair value $33,000 more than its book value. Donovan has developed unpatented technology appraised at $29,600, although is it not recorded in its financial records. Donovan has a research and development activity in process with an appraised fair value of $45,500. The project has not yet reached technological feasibility. Book values for Donovan’s current assets and liabilities approximate fair values. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?

Answer 1

Beasley should record total liabilities of $165,300 in connection with the merger with Donovan. This figure includes Donovan's original liabilities, accounts payable for merger-related fees, and the present value of an estimated contingent payment.

Step-by-step explanation:

In calculating the total liabilities incurred or assumed by Beasley in the merger with Donovan, we should consider the following:

• Original liabilities of Donovan: $122,500

• Liabilities for legal and accounting fees: $21,300

• Contingent liability for meeting revenue goals: $21,500

• Thus, the total liabilities that Beasley should record related to the merger would be:

• $122,500 (original liabilities) + $21,300 (fees) + $21,500 (contingency) = $165,300.

• This sum represents the actual liabilities Beasley needs to account for upon the completion of the merger with Donovan. It is important to note that while the contingent payment depends on future revenue goals being met, the amount recorded is the present value of the estimated payment — reflecting the probability-adjusted expected payment for this uncertain event.