6th Edition

ISBN: 9780077862237

Author: Joe Ben Hoyle, Thomas Schaefer, Timothy Doupnik

Publisher: McGraw-Hill Education

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Textbook Question

Chapter 2, Problem 12P

On May 1, Donovan Company reported the following account balances:

Current assets	$ 90,000
Buildings & equipment (net)	220,000
Total assets	$310,000
Liabilities	$ 60,000
Common stock	150,000
Retained earnings	100,000
Total liabilities and equities	$310,000

On May 1, Beasley paid $400,000 in stock (fair value) for all of the assets and liabilities of Donovan, which will cease to exist as a separate entity. In connection with the merger, Beasley incurred $15,000 in accounts payable for legal and accounting fees.

Beasley also agreed to pay $75,000 to the former owners of Donovan contingent on meeting certain revenue goals during the following year. Beasley estimated the present value of its probability adjusted expected payment for the contingency at $20,000. In determining its offer, Beasley noted the following:

Donovan holds a building with a fair value $30,000 more than its book value.
Donovan has developed unpatented technology appraised at $25,000, although is it not recorded in its financial records.
Donovan has a research and development activity in process with an appraised fair value of $45,000. The project has not yet reached technological feasibility.
Book values for Donovan's current assets and liabilities approximate fair values.
12. What should Beasley record as total liabilities incurred or assumed in connection with the Donovan merger?

1. a. $15,000
2. b. $75,000
3. c. $95,000
4. d. $150,000

Definition Definition Costs that a business is responsible for paying, should a particular event potentially occur in the future. Also called a potential liability, a contingent liability is generally recorded only when the amount of liability can be reasonably estimated and the contingency is likely to occur shortly. The Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Principles (IFRS) make it mandatory for the companies to record any contingent liability taking the principles of full disclosure, materiality, and prudence into consideration.

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Chapter 2, Problem 11P

Chapter 2, Problem 13P

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Chapter 2 Solutions

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Solution Summary: The author explains that Company B records the amount as total liabilities incurred or assumed in connection with the Company D merger.

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