Question

SafeData Corporation has the following account balances and respective fair values on June 30:

	Book Values				Fair Values
Receivables	$	104,000			$	104,000
Patented technology		162,000				162,000
Customer relationships		0				732,000
In-process research and development		0				484,000
Liabilities		(448,000	)			(448,000	)
Common stock		(100,000	)
Additional paid-in capital		(300,000	)
Retained earnings deficit, 1/1		686,000
Revenues		(420,000	)
Expenses		316,000

Privacy First, Inc., obtained all of the outstanding shares of SafeData on June 30 by issuing 20,000 shares of common stock having a $1 par value but a $70 fair value. Privacy First incurred $10,000 in stock issuance costs and paid $70,000 to an investment banking firm for its assistance in arranging the combination. In negotiating the final terms of the deal, Privacy First also agrees to pay $95,000 to SafeData’s former owners if it achieves certain revenue goals in the next two years. Privacy First estimates the probability adjusted present value of this contingent performance obligation at $28,500.

1. What is the fair value of the consideration transferred in this combination?
2. How should the stock issuance costs appear in Privacy First’s postcombination financial statements?
3. How should Privacy First account for the fee paid to the investment bank?
4. How does the issuance of these shares affect the stockholders’ equity accounts of Privacy First, the parent?
5. How is the fair value of the consideration transferred in the combination allocated among the assets acquired and the liabilities assumed?
8. If Privacy First’s stock had been worth only $45 per share rather than $70, how would the consolidation of SafeData’s assets and liabilities have been affected?

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
a.	The fair value of the consideration includes
	Fair value of stock issued	$                                                                        1,400,000
	Contingent performance obligation	$                                                                              28,500
	Fair value of consideration transferred	$                                                                        1,428,500
b.	Under the acquisition method, stock issue costs reduce additional paid-in capital.
c.	The acquisition method records direct costs (such as fees paid to investment banks for arranging the combination) as expenses.
d.	The par value of the 20,000 shares issued is recorded as an increase of $20,000 in the Common Stock account.
	The $69 fair value in excess of par value ($70 – $1) is an increase to additional paid-in capital of $1,380,000 ($69 × 20,000 shares).
e.	Fair value of consideration transferred (20,000*$45)+$28,500		$         928,500
	Receivables	$                                                                           104,000
	Patented technology	$                                                                           162,000
	Customer relationships	$                                                                           732,000
	IPR&D asset	$                                                                           484,000
	Liabilities	$                                                                         (448,000)	$     1,034,000
	Gain on bargain purchase		$         105,500