[von2015]

Hi everyone, it’s my first time posting to ask a question.. so please bare with me if I don’t come across coherently 🙂

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $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?

Answer: $70,000

Dr CAR $130,000

Cr Investment in Smith $210,000

Cr NCI 0

Dr Balance Sheet Adjustment $150,000

Dr Identifiable intangibles 0

Cr Gain $70,000

CAR = $200,000 BV of assets – $70,000 BV of liabilities = $130,000

Investment in Smith = (20,000 shares x $10/share) + $10,000 contingent consideration = $210,000

Balance Sheet Adjustment = $350,000 FV of assets – $200,000 BV of assets = $150,000

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I got the same answer but my logic isn’t the same as Becker’s explanation.

The FV of the net assets = A – L = 350,000 – 70,000 = 280,000

The BV of the net assets = A- L = 200,000 – 70,000 = 130,000

The Balance Sheet Adjustment would therefore be 280,000 – 130,000 = 150,000. I don’t understand Becker’s explanation that the Balance Sheet Adjustment is calculated from 350,000 FV of assets – 200,000 BV of assets. Why aren’t the liabilities taken into account?

I know I still got the same answer but I just want to know if my logic is correct. It has always been the “net” assets, not just assets used in the calculations. I’ve been using the same logic for all the other problems and this is the only one that is messing up head. Any clarification/guidance would be greatly appreciated!!

[Anonymous]

My guess is that they excluded it in the work because it specifically outlines the book and fair value of the liabilities as both being $70,000 in the question. One could infer that given that information, it wouldn't have an impact.

[von2015]

Thanks EHendrickson!

[Author]

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