Question

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

	Book Values				Fair Values
Receivables	$	128,500			$	128,500
Patented technology		163,000				163,000
Customer relationships		0				712,000
In-process research and development		0				626,000
Liabilities		(532,000	)			(532,000	)
Common stock		(100,000	)
Additional paid-in capital		(300,000	)
Retained earnings deficit, 1/1		760,100
Revenues		(498,000	)
Expenses		378,400

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 $75 fair value. Privacy First incurred $10,000 in stock issuance costs and paid $75,000 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 $100,000 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 $30,000.

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 post combination 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?

6. If Privacy First’s stock had been worth only $50 per share rather than $75, how would the consolidation of SafeData’s assets and liabilities have been affected?

Answer 1

a.   

The fair value of the consideration includes

Fair value of stock issued   $1,500,000

Contingent performance obligation    30,000

Fair value of consideration transferred $1,530,000

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 $74 fair value in excess of par value ($75 – $1) is an increase to additional paid-in capital of $1,480,000 ($74 × 20,000 shares).

e.   

Fair value of consideration transferred (above)   $1,530,000

  Receivables     $ 128,500

  Patented technology 163,000

  Customer relationships 712,000

  IPR&D 626,000

  Liabilities     (532,000)   1,097,500

  Goodwill $ 432,500.

f.

The fair value of the consideration transferred is now $1,030,000. This amount indicates a Loss purchase:

  Fair value of consideration transferred (above)   $1,030,000

Receivables     $ 128,500

Patented technology 163,000

Customer relationships 172000

IPR&D asset 626,000

  Liabilities     (532,000)   1,097,500

Loss on bargain purchase $ (67,500).