[jairvin3]

NINJA Question –

The question reads as follows:

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in direct acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?

The answer and explanation were as follows:

Cost of investment (FV) 20,000 X $10 = 200,000

Contingent Consideration 10,000 = 10,000

Total Cost Investment 210,000

Less: BV of net assets of Smith 280,000 (350,000-70,000)

Extraordinary Gain: 70,000 (210,000-280,000)

My question is:

The explanation states its using the BV of the net assets of Smith to compute the G/L. However, the BV is not 350K and the explanation is really using the FV. I do not know how to correctly solve this because I think the explanation has an error. Is the correct way to solve: FV given up – BV net assets acquiring? OR FV given up – FV net assets acquiring?

[Lidis]

Hi, jairvin3

I have on my notes:

If the fair value of the identifiable assets acquired in an acquisition exceeds the cost of the acquisition. the excess must be recognized as an extraordinary gain

[jairvin3]

Thanks, Revenue. Yes I understand it's an extraordinary gain. But what is unclear about the question is the actual method of computing the gain and what they have in the explanation. To compute the gain you have to start with the FV of what you are giving up. In this case, $200,000 worth of stock and $10,000 of contingent consideration. From that you have to subtract either the BV of what you are buying, or the FV. That is what I do not know. FV or BV of what you are buying?

[SaveBandit]

I agree the explanation is wonky.

To find Goodwill/(or Gain):

FV consideration transferred 210k

Less: FV net identifiable assets 280k

Gain 70k

On some of these problems, you might have to use BV to calculate the answer, BUT they would have to give you which assets are under/over valued so you could derive goodwill/gain. Here, they give you FV on net identifiable assets upfront, so you don't have to add the over/under valued assets back to the BV to find goodwill.

In other words, the problem could have read, “the Book Value of assets is 200,000 but Equipment was under valued by 150,000. The book value of liabilities are 70,000. Any excess of fair value over book value can be applied to goodwill. What amount should Damon report as gain?”

FV 210,000

BV 130,000

Excess = 80,000

Excess 80,000

Equip (150,000)

Gain on Bargain Purchase 70,000

4 for 4

FAR 85
AUD 94
BEC 86
REG 90

[str6116]

Anyone else find Becker's silly “CAR IN BIG” mnemonic kinda helpful for these kind of questions? For this problem:

DR: Common stock

APIC

Retained Earnings all for $130k (BV Assets 200 – BV Liabilities 70)

CR: Investment in Sub $210k

Noncontrolling Interest (Not applicable)

DR: Balance sheet adjustment $150k (FV Assets 350 – FV Liabilities 70 = $280k less the FV of $130k above)

Intangible asset adjustment (not applicable)

CR: Gain $70k

Kind of weird doing it this way since I vaguely remembering approaching consolidations in a completely different way in my advanced accounting class, but it's helped with the consolidation MCQ's involving calculating goodwill/gain. Here's hoping I don't get tripped up on exam day with this topic.

FAR-82 (7/27/15)
AUD-74 (8/31/15), 92 (1/4/16)
REG-65 (10/28/15), 70 (6/9/16), 80 (7/18/16)
BEC-86 (11/28/15)

DONE

...and that's all the people need to know.

[Author]

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