Question

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

	Book Values				Fair Values
Receivables	$	108,000			$	108,000
Patented technology		123,000				123,000
Customer relationships		0				840,000
In-process research and development		0				524,000
Liabilities		(596,000	)			(596,000	)
Common stock		(100,000	)
Additional paid-in capital		(300,000	)
Retained earnings deficit, 1/1		847,400
Revenues		(312,000	)
Expenses		229,600

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 $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?
6. 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

Step-1
(a) The fair value of the consideration includes

Particulars	Amount($)
Fair value of stock issued	1,400,000
Contingent performance obligation	28,500
Fair value of consideration transferred	1,428,500

(b) Stock issue costs shall reduce additional paid-in capital.

Step-2
(c) In a business combination, direct acquisition costs (such as fees paid to investment banks for arranging the transaction) shall be treated as an expenses.

Step-3
(d) The par value of the 20,000 shares issued shall be recorded as an increase of $20,000 in the Common Stock account. The $69 fair value in excess of par value ($70 - $1) shall be an increase to additional paid-in capital of $1,380,000 ($69 × 20,000 shares).

Step-4
(e) Fair value of consideration transferred in the combination is shown as follows:

Particulars	Amount($)	Amount($)
Fair value of consideration transferred		1,428,500
Receivables	108,000
Patented technology	123,000
Customer relationships	840,000
In-process research and development	524,000
Liabilities	-596000	999,000
Goodwill		$ 429,500

Step-5
(f) Revenues and expenses of the subsidiary from the period prior to the combination should be omitted from the consolidated totals. Only the operational figures for the subsidiary after the purchase shall be applicable to the business combination. The previous owners earned any previous profits.

Step-6
(g) The subsidiary’s Common Stock and Additional Paid-in Capital accounts shall have no impact on the consolidated totals.

Step-7
(h)The fair value of the consideration transferred shall be $928500. This amount indicates a bargain purchase and shall be calculated as follows:

Particulars	Amount($)	Amount($)
Fair value of consideration transferred		928,500
Receivables	108,000
Patented technology	123,000
Customer relationships	840,000
In-process research and development	524,000
Liabilities	-596000	999,000
Gain on Bargain Purchase		$ 70,500

The values of S’s assets and liabilities should be recorded at fair value, but there shall be no goodwill recognized and a gain on bargain purchase should be reported.