Question

Pear Company acquired all of Strawberry, Inc.'s outstanding
shares on January 1. Pear paid $300,000 and issued $200,000
in long-term liabilities and paid $35,000 in legal fees.
Pear also agreed to pay $75,000 to the former owners of
Strawberry contingent on meeting certain revenue goals during
the following year. Pear estimated the present value of its
probability adjusted expected payment for the
contingency or contingent obligation at $23,000
Precombination book values for Strawberry are as follows:
Current assets $ 85,000
Equipment 90,000
Buildings 175,000
Goodwill 30,000
Total $ 380,000
Current liabilities $ (50,000)
Common stock (180,000)
Retained earnings (115,000)
Revenues (135,000)
Expenses 100,000
Total $ 380,000
Pear's appraisal of Strawberry found two balance sheet accounts
that differed from fair value. Equipment was undervalued by
$15,000 and Buildings by $5,000. Pear noted that Strawberry
has unrecorded client contracts worth $60,000 and research and
development activity in process with an appraised
fair value of $90,000
a. What is the total consideration given by Pear?
(Show your calculations.)
b. What values for each of the acquired assets and
liabilities will be used in the consolidation?

Answer 1

a. Total consideration given to pear:

Cash	$300,000
Long term liabilty issued	$200,000
Legal fees	$35,000
	$535,000

legal fees being directly attributable to the cost of acquisition is to be included in the total consideration.

b. Goodwill calculation

Consideration		$535,000
Less	Fair value of net assets acquired
	Book value of assets excluding goodwill	$350,000
	Fai value adjustments	$20,000
	Equipment 15,000 Building 5,000
	Total assets	$370,000
	Less: Book value of liabilities	($50,000)
	Fair value adjustments	($60,000)
	Unrecorded client contract 60,000
	Total liabilities	($110,000)	$260,000
Goodwill		$275,000

Value of assets and liabilties used in consolidation:

	Before Acquisition	Adjustments	Consolidation amount
Current assets	$85,000	-	$85,000
Equipment	$90,000	$15,000	$105,000
Building	$175,000	$5,000	$180,000
Goodwill	$30,000	($30,000)	-
Goodwill on account of acquisition		$275,000	$275,000
Total Assets	$380,000	$265,000	$645,000
Current liabilities	($50,000)	-	($50,000)
Common stock	($180,000)	$180,000	-
Retained earnings	($115,000)	$115,000	-
Revenue	($135,000)	$135,000	-
Expenses	$100,000	($100,000)	-
Unrecorded client contract	-	($60,000)	($60,000)
Total Liabilities	($380,000)	$270,000	($110,000)