Question

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

	Book Values				Fair Values
Receivables	$	86,000			$	86,000
Patented technology		121,000				121,000
Customer relationships		0				688,000
In-process research and development		0				528,000
Liabilities		(476,000	)			(476,000	)
Common stock		(100,000	)
Additional paid-in capital		(300,000	)
Retained earnings deficit, 1/1		775,800
Revenues		(434,000	)
Expenses		327,200

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

Part A

Fair value of consideration transferred

$1327000

Fair value of stock issued (20000*65)	1300000
Contingent performance obligation	27000
Fair value of consideration transferred	$1327000

Part B

Stock issuance costs

reduce

the

Additional paid-in capital

Part C

Fee paid to the investment bank is recorded as

expense

Fees paid to investment banks for arranging the transaction is a direct acquisition cost and such costs are reported as expenses in business combination.

Part D

Common stock account	increases	by	20000
Additional paid in capital	increases	by	1280000

20000*1 = 20000

20000*64 = 1280000

Part E

Fair value of consideration transferred		1300000
Receivables	86000
Patented technology	121000
Customer relationships	688000
In-process research and development	528000
Liabilities	(476000)	947000
Goodwill		$353000

Part F

The values of SafeData's assets and liabilities would be recorded at fair value and a gain on bargain purchase of $130,000 would be recorded.