31. (50 Minutes) (Prepare balance sheet for a statutory merger using the
acquisition method. Also, use worksheet to derive consolidated totals.)
a. In accounting for the combination of NewTune and On-the-Go, the fair value of
the acquisition is allocated to each identifiable asset and liability acquired with
any remaining excess attributed to goodwill.
Fair value of consideration transferred (shares issued) $750,000
Fair value of net assets acquired:
Cash $ 29,000
In-process research and development 200,000
Equipment 105,000
Accounts payable (34,000)
Notes payable (45 ,000) 723 ,000
Goodwill $ 27 ,000
Journal entries by NewTune to record combination with On-the-Go:
Cash 29,000
Receivables 63,000
Trademarks 225,000
Goodwill 27,000
Accounts Payable 34,000
(To record merger with On-the-Go at fair value)
Additional Paid-In Capital 25,000
Cash 25,000
(Stock issue costs incurred)
Problem 31 (continued):
Post-Combination Balance Sheet:
Assets Liabilities and Owners’ Equity
Cash $ 64,000 Accounts payable $ 144,000
Research and
development asset 200,000 Common stock 460,000
Equipment 425,000 Additional paid-in capital 695,000
b. Because On-the-Go continues as a separate legal entity, NewTune first records
the acquisition as an investment in the shares of On-the-Go.
Journal entries:
Investment in On-the-Go 750,000
Additional Paid-In Capital 25,000
Cash 25,000
(Stock issue costs incurred)
31. (continued) NEWTUNE, INC., AND ON-THE-GO CO.
b. Consolidation Worksheet
January 1, 2015
Consolidation Entries Consolidated
Accounts NewTune, Inc. On-the-Go Co. Debit Credit Totals
Investment in On-the-Go 750,000 -0- (S) 270,000
(A) 480,000 -0-
Trademarks 400,000 95,000 (A) 130,000 625,000
Record music catalog 840,000 60,000 (A) 120,000 1,020,000
Research and development asset -0- -0- (A) 200,000 200,000
Equipment 320,000 105,000 425,000
Goodwill -0 – -0- (A) 27,000 27 ,000
Totals 2 ,495,000 354 ,000 2 ,574,000
Totals 2 ,495,000 354 ,000 752,000 752,000 2 ,574,000
Note: The accounts of NewTune have already been adjusted for the first three journal entries indicated in the answer to Part
b. to record the acquisition fair value and the stock issuance costs.
The consolidation entries are designed to:
Eliminate the stockholders’ equity accounts of the subsidiary (S)
c. The consolidated balance sheets in parts a. and b. above are identical. The financial reporting consequences for a 100%
32. (40 minutes) (Prepare a consolidated balance sheet using the acquisition
method).
a. Journal entries to record the acquisition on Pacifica’s records.
Investment in Seguros 1,062,500
Common Stock (50,000 × $5) 250,000
The contingent consideration is computed as:
$130,000 payment × 50% probability × 0.961538 present value factor
Professional Services Expense 15,000
Cash 15,000
Additional Paid-In Capital 9,000
Cash 9,000
b. and c.
Pacifica Seguros Consolidation Entries
Consolidated
Balance
Sheet
Revenues (1,200,000) (1,200,000)
Expenses 890,000 890,000
Net income (310,000) (310,000)
Cash 86,000 85,000 171,000
Receivables and inventory 750,000 190,000 (A) 10,000 930,000
Property, plant and equipment 1,400,000 450,000 (A)150,000 2,000,000
Investment in Seguros 1,062,500 (S) 705,000 0
(A) 357,500
Liabilities (500,000) (180,000) (680,000)
Contingent performance obligation (62,500) (62,500)
Common stock (650,000) (200,000) (S) 200,000 (650,000)
Answers to Appendix Problems
33. (25 minutes) Journal entries for a merger using legacy purchase method.
Also compare to acquisition method.
a. Purchase Method
1. Purchase price (including acquisition costs) $635,000
Journal entry:
Current Assets 80,000
Equipment 180,000
Trademark 320,000
Cash 635,000
2. Acquisition date fair values:
Purchase price (including acquisition costs) $450,000
Allocation of bargain purchase to long-term assets acquired:
Total Asset
Fair value Prop. reduction reduction
Equipment $180,000 36% x $75,000 = $27,000
Journal entry:
Current Assets 80,000
Equipment ($180,000 – $27,000) 153,000
33. continued
b. Acquisition Method
1. Consideration transferred $ 610,000
Journal entry:
Current Assets 80,000
Equipment 180,000
Trademark 320,000
Goodwill 85,000
Professional Services Expense 25,000
Cash 25,000
Journal entry:
Current Assets 80,000
Equipment 180,000
Trademark 320,000
Cash 25,000
34. (25 minutes) (Pooling vs. purchase involving an unrecorded intangible)
a. Purchase Pooling
Inventory $ 650,000 $ 600,000
Unpatented technology 1,500,000-0-
Goodwill 600 ,000
-0-
Total $4 ,500,000$1,950,000
b. Pre-acquisition revenues and expenses were excluded from consolidated
c. Poolings, in most cases, produce higher rates of return on assets than
purchase accounting because the denominator typically is much lower. In
the case of the Swimwear acquisition pooling produced an increment to total
Chapter 2 Develop Your Skills
CONSIDERATION OR COMPENSATION CASE (estimated time 40 minutes)
According to FASB ASC (805-10-55-25):
If it is not clear whether an arrangement for payments to employees or selling
shareholders is part of the exchange for the acquiree or is a transaction separate from
the business combination, the acquirer should consider the following indicators:
a. Continuing employment. The terms of continuing employment by the selling
shareholders who become key employees may be an indicator of the substance of
a contingent consideration arrangement. The relevant terms of continuing
employment may be included in an employment agreement, acquisition
b. Duration of continuing employment. If the period of required employment
indicate that the contingent payments are, in substance, compensation.
c. Level of compensation. Situations in which employee compensation other than
d. Incremental payments to employees. If selling shareholders who do not become
employees receive lower contingent payments on a per-share basis than the
e. Number of shares owned. The relative number of shares owned by the selling
shareholders who remain as key employees may be an indicator of the substance
of the contingent consideration arrangement. For example, if the selling
shareholders who owned substantially all of the shares in the acquiree continue
as key employees, that fact may indicate that the arrangement is, in substance, a
f. Linkage to the valuation. If the initial consideration transferred at the acquisition
date is based on the low end of a range established in the valuation of the
g. Formula for determining consideration. The formula used to determine the
contingent payment may be helpful in assessing the substance of the
arrangement. For example, if a contingent payment is determined on the basis of a
Suggested answer:
Note: This case was designed to have conflicting indicators across the various criteria
In the author’s judgment, the $8 million contingent payment (fair value = $4 million) is
contingent consideration to be included in the overall fair value NaviNow records for its
The profit-sharing component of the employment contract appears to be compensation.
Criteria g. specifically identifies profit-sharing arrangements as indicative of
compensation for services rendered. Criteria a. also applies given that the employees
ASC RESEARCH CASE—DEFENSIVE INTANGIBLE ASSET (35 MINUTES)
a. The ASC Glossary defines a defensive intangible asset as
“An acquired intangible asset in a situation in which an entity does not intend to actively
ASC 820-10-35-10D also observes that
To protect its competitive position, or for other reasons, a reporting entity may intend not
to use an acquired nonfinancial asset actively, or it may intend not to use the asset
According to ASC 350-30-25-5 a defensive intangible asset should be accounted for as a
b. The identifiable assets acquired in a business combination should be measured at
c. A fair value measurement assumes the highest and best use of an asset by market
participants. Highest and best use is determined based on the use of the asset by market
d. A defensive intangible asset shall be assigned a useful life that reflects the entity’s
consumption of the expected benefits related to that asset. The benefit a reporting entity
receives from holding a defensive intangible asset is the direct and indirect cash flows
resulting from the entity preventing others from realizing any value from the intangible
contribute directly or indirectly to the future cash flows of the entity. (ASC 350-30-35A)
It would be rare for a defensive intangible asset to have an indefinite life because the fair
value of the defensive intangible asset will generally diminish over time as a result of a
RESEARCH CASE—CELGENE’S ACQUISITION OF AVILA THERAPEUTICS
(25 Minutes)
2. Celgene accounted for its March 7, 2012 acquisition of Avila Therapeutics using the
acquisition method. Accordingly, Celgene recorded the acquisition at $535 million.
Cash consideration:
Cash $363,405
Contingent consideration 171 ,654
Total fair value of consideration transferred $535,059
Working capital (cash, A/R, A/P, etc.) $ 11,987
Property, plant, and equipment 2,559
Platform technology intangible asset 330,800
Celgene determined these allocations by estimating fair values for each of the assets
acquired and the liabilities assumed.
4. As shown in the part 3. Schedule above, Celgene included $171.654 million of fair
5. Acquired in-process research and development product rights are accounted for as an
intangible asset with an indefinite life.