Question

2. XYZ Corporation has the following account balances and respective fair values on June 30: Book Values Fair Values $ 80,000 100,000 $ 80,000 700,000 500,000 300,000 (400,000) Receivables Patented technology Customer relationships In-process research and development Liabilities Common stock Additional paid-in capital Retained earnings deficit, 1/1 Revenues Expenses -0- (400,000) (100,000) (300,000) 700,000 (300,000) 220,000 ABC, Company. obtained all of the outstanding shares of XYZ on June 30 by issuing 20,000 shares of common stock having a $1 par value but a $75 fair market value. ABC incurred $10,000 in stock issuance costs and paid $75,000 to an investment banking firm for its assistance in arranging the combination. In negotiating the final terms of the deal, ABC also agrees to pay $100,000 to XYZ's former owners if it achieves certain revenue goals in the next two years. ABC estimates the probability adjusted present value of this contingent performance obligation at $30,000. The transaction is to be accounted for using the acquisition method. a. What is the fair value of the consideration transferred in this combination? b. What is the fair value of the net assets acquired and the liabilities assumed? c. Record the necessary journal entries. d. If ABC's stock had been worth only $50 per share rather than $75, what would be the effect on the entry? Journalize it.​

Answer 1

a. The fair value of the consideration transferred in this combination is $1,510,000 ($75 x 20,000 shares + $10,000 issuance costs + $75,000 investment banking fee + $100,000 contingent payment obligation).

b. The fair value of the net assets acquired and the liabilities assumed is $1,300,000 ($1,500,000 total fair value - $200,000 liabilities).

c. The necessary journal entries are:

1. To record the acquisition:

Dr. Patented technology $500,000

Dr. Customer relationships $300,000

Dr. In-process research and development $220,000

Dr. Goodwill $280,000

Cr. Common stock $20,000

Cr. Additional paid-in capital $1,490,000

Cr. Cash $10,000

Cr. Contingent consideration liability $30,000

2. To record the payment of the investment banking fee:

Dr. Investment banking fee expense $75,000

Cr. Cash $75,000

d. If ABC's stock had been worth only $50 per share rather than $75, the entry would be:

Dr. Patented technology $500,000

Dr. Customer relationships $300,000

Dr. In-process research and development $220,000

Dr. Goodwill $280,000

Cr. Common stock $20,000

Cr. Additional paid-in capital $980,000

Cr. Cash $10,000

Cr. Contingent consideration liability $30,000

The decrease in the fair value of the consideration transferred would result in a decrease in the amount credited to additional paid-in capital.