Question

On May 1, Donovan Company reported the following account balances: Current assets Buildings & equipment (net) Total assets Liabilities Common stock Retained earnings Total liabilities and equities $ 90,000 220,000 $ 310,000 $ 60,000 150,000 100,000 $ 310,000 On May 1, Beasley paid $400,000 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 $15,000 in accounts payable for legal and accounting fees. Beasley also agreed to pay $75,000 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 $20,000. In determining its offer. Beasley noted the following: • Donovan holds a building with a fair value $30,000 more than its book value. • Donovan has developed unpatented technology appraised at $25,000, although is it not recorded in its financial records. . Donovan has a research and development activity in process with an appraised fair value of $45.000. The project has not yet reached technological feasibility. • Book values for Donovan's current assets and liabilities approximate fair values.

Answer 1

Solution:

Calculation of total assets to be recorded by Beasley in the Donovan merger:

1) Goodwill calculation:

Consideration transferred ( fair value) = $ 400,000 + $20,000 ( adjusted expected payment)..... (1)	$ 420,000
Calculation of fair value of net identifiable assets acquired:
Current Assets	90,000
Building & Equipment fair value ( $ 220,000 + 30,000)	250,000
Unpatented Technology	25,000
Research & Development asset	45,000
Liabilities	(60,000)
Fair value of net identifiable assets acquired.......(2)	$ 350,000
Goodwill (1) - (2)	$ 70,000

2) Total Assets:

Current assets	$ 90,000
Building & Equipment ( 220,000 + 30,000)	$ 250,000
Unpatented Technology	$ 25,000
Research & Development asset	$ 45,000
Goodwill	$ 70,000
Total Assets	$ 480,000