Question

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

	Book Values				Fair Values
Receivables	$	83,500			$	83,500
Patented technology		149,000				149,000
Customer relationships		0				748,000
In-process research and development		0				590,000
Liabilities		(576,000	)			(576,000	)
Common stock		(100,000	)
Additional paid-in capital		(300,000	)
Retained earnings deficit, 1/1		833,900
Revenues		(352,000	)
Expenses		261,600

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 $65 fair value. Privacy First incurred $10,000 in stock issuance costs and paid $65,000 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 $90,000 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 $27,000.

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 $40 per share rather than $65, how would the consolidation of SafeData’s assets and liabilities have been affected?

Answer 1

Answer:

a.

The fair value of the consideration:
Fair value of stock issued	1,300,000	(20000*65)
Contingent performance obligation	27,000
Fair value of consideration transferred	1,327,000

b. Stock issuance costs will reduce the additional paid in capital.

c. Direct acquisition costs such as fees paid to investment banks are recognised an expense.

d. In the common stock account, there will be an increase of $20,000 is recorded which is the par value of the 20,000 shares issued. The $64 fair value in excess of par vale ($65-$1) is an increase to the additional paid in capital of $1,280,000 ($64*20000 shares).

e.

The fair value of the consideration transferred (above)		1327000
Recievables	83,500
Patented technology	149,000
Customer relationships	748,000
In-process research and development	590,000
Liabilities	-576,000	994,500
Goodwill		332,500

f. The fair value of the consideration transferred is now $827,000. This amount indicates a bargain purchase calculated below:

Fair value of stock issued	800000
Contingent performance obligation	27000
Fair value of consideration transferred	827000

The fair value of the consideration transferred (above)		827000
Recievables	83,500
Patented technology	149,000
Customer relationships	748,000
Research and development asset	590,000
Liabilities	-576,000	994,500
Loss on bargain purchase		-167,500

The values of SafeData's assets and liabilities would be recorded at fair value, but there would be no goodwill recognized and a loss on bargain purchase would be reported.