Question

Alpha obtains 100% of Beta on January 1, Year 1. Alpha spent $10,000,000 in cash, and...

Alpha obtains 100% of Beta on January 1, Year 1. Alpha spent $10,000,000 in cash, and also gave to Beta’s shareholders some Alpha Company stock that had a par value of $700,000 and a fair value of $3,000,000. Alpha spent $20,000 on lawyer and accounting fees in connection with the deal, and $10,000 on stock registration fees. Also, Alpha agreed to pay Beta’s shareholders an extra amount, of up to $1,000,000, if the income from Beta over the next two years exceeds certain targets. The estimated fair value of this contingent consideration is $150,000 on January 1, Year 1.

A Compute the total consideration transferred as part of this acquisition.

B Use your answer from the previous question in answering this question

As of the date of acquisition, Beta had shareholders equity of $10,000,000. All its assets and liabilities had book values equal to fair values except land and its liabilities for lawsuits. The book value of the land was $1,200,000 and the fair value was $1,500,000. The company’s books showed a liability for pending litigation of $500,000 but the appropriate fair value of the liability should be $750,000. Compute the goodwill or bargain purchase gain on this transaction.

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Answer #1
Particulars Amount($)
Cash payment 1000000
Fair value of stock 3000000
Lawyer & accounting Fee 20000
Stock registration Fee 10000
Fair value of contigent consideration 150000
Total Consideration For acquisition (A) 4180000
Particulars Amount($)
Equity Shareholders 1000000
Add: Excess of fair value in Land ($1,500,000 - $1,200,000) 300000
Less: Excess of Pending litigation ($750,000 - $500,000) -250000
Total Fair value of Acquisition Net assets (Assets - Liabilities) (B) 1050000
Total Consideration For acquisition (A) 4180000
Goodwill (A - B) 3130000
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