Question

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

	Book Values				Fair Values
Receivables	$	103,500			$	103,500
Patented technology		109,000				109,000
Customer relationships		0				670,000
In-process research and development		0				338,000
Liabilities		(578,000	)			(578,000	)
Common stock		(100,000	)
Additional paid-in capital		(300,000	)
Retained earnings deficit, 1/1		853,500
Revenues		(340,000	)
Expenses		252,000

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 $50 fair value. Privacy First incurred $10,000 in stock issuance costs and paid $50,000 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 $75,000 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 $22,500.

a)What is the fair value of the consideration transferred in this combination?

b)How should the stock issuance costs appear in Privacy First’s postcombination financial statements?

c)How should Privacy First account for the fee paid to the investment bank?

d)How does the issuance of these shares affect the stockholders’ equity accounts of Privacy First, the parent?

e)How is the fair value of the consideration transferred in the combination allocated among the assets acquired and the liabilities assumed?

f)If Privacy First’s stock had been worth only $25 per share rather than $50, 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(20000 x $50)   $1,000,000

                 Contingent performance obligation                 22,500

                 Fair value of consideration transferred    $1,022,500

b.   Stock issue costs reduce additional paid-in capital.

c. In a business combination, direct acquisition costs (such as fees paid to investment banks for arranging the transaction) 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 $49 fair value in excess of par value ($50 – $1) is an increase to additional paid-in capital of $980,000 ($49 × 20,000 shares).

e.   Fair value of consideration transferred (above)                    $1,022,500

      Receivables                                                            $ 103,500

      Patented technology                                               109,000

      Customer relationships                                          670,000

      In-process research and development              338,000

      Liabilities                                                                  (578,000)           642,500

      Goodwill                                                                                             $ 380,000

f.    The fair value of the consideration transferred is now $522,500. This amount indicates a bargain purchase calculated as follows:

      Fair value of consideration transferred                                      $522,500

           Receivables                                                       $ 103,500

           Patented technology                                          109,000

           Customer relationships                                     670,000

           Research and development asset                  338,000

           Liabilities                                                             (578,000)           642,500

      Gain on bargain purchase                                                            $ 120,000

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