Question

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

Receivables Patented technology Customer relationships In-process research and development Liabilities Common stock Additional paid-in capital Retained earnings deficit, 1/1 Revenues Expenses Book Values Fair Values $ 107,000 $ 107,000 181,000 181,000 642,000 474,000 (488,000) (488,000) (100,000) (300,000) 712,800 (464,000) 351,200

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 $60 fair value. Privacy First incurred $10,000 in stock issuance costs and paid $60,000 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 $85,000 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 $25,500.

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

b) If Privacy First’s stock had been worth only $35 per share rather than $60, how would the consolidation of SafeData’s assets and liabilities have been affected?

Answer 1

Part a)

The fair value of the consideration transferred is determined as below:

Fair Value of the Stock Issued (20,000*60)	1,200,000
Add Contingent Performance Obligation	25,500
Fair Value of Consideration Transferred	$1,225,500

Part b)

The revised values are determined as below:

Fair Value of Consideration Transferred (20,000*35 + 25,500)		725,500
Receivables	107,000
Patented Technology	181,000
Customer Relationships	642,000
In-Process Research and Development	474,000
Liabilities	-488,000	916,000
Gain on Bargain Purchase		$190,500