Question

On May 1, Donovan Company reported the following account balances:

Current assets	$	130,000
Buildings & equipment (net)		260,000
Total assets	$	390,000
Liabilities	$	98,500
Common stock		150,000
Retained earnings		141,500
Total liabilities and equities	$	390,000

On May 1, Beasley paid $465,200 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 $15,900 in accounts payable for legal and accounting fees.

Beasley also agreed to pay $90,000 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 $26,500. In determining its offer, Beasley noted the following:

• Donovan holds a building with a fair value $38,200 more than its book value.
• Donovan has developed unpatented technology appraised at $30,200, although is it not recorded in its financial records.
• Donovan has a research and development activity in process with an appraised fair value of $54,600. The project has not yet reached technological feasibility.
• Book values for Donovan’s current assets and liabilities approximate fair values.

Problem 2-12 (LO 2-4, 2-5)

12. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?

Multiple Choice

• $114,400.

• $140,900.

• $15,900.

• 150,000.

Answer 1

$114,400

Current liabilities at book value	$    98,500.00
Accounts payable for legal and accounting fees	$    15,900.00
Total liabilities incurred or assumed	$114,400