[ormella]

Raphael Company paid $2,000,000 for the net assets of Paris Corporation and Paris was then dissolved. Paris had no liabilities. The fair values of Paris assets were $2,500,000. Paris s only non-current assets were land and equipment with fair values of $160,000 and $640,000, respectively. At what value will the equipment be recorded by Raphael?

[bendingleconte]

Ooh, the answer to this one is right under your nose...
You are asking "at what value will the equipment be recorded."

Raphael will record the fair market value of the equipment (stated in the question) as valued at $640,000.

[ormella]

Ooh, the answer to this one is right under your nose...
You are asking "at what value will the equipment be recorded."

Raphael will record the fair market value of the equipment (stated in the question) as valued at $640,000.

Thank you very much for your help.. It what I tought but if looked too easy:)

[ArcSine]

I'm curious, though... if Raphael lays all of the acquired assets onto its balance sheet at their fair values (land at 160K; equip at 640K; etc.) then in totality it'll be debiting 2.5M onto its balance sheet.

Having given only 2.0M in total consideration (cash, notes, stock, whatever), we've got credits totalling 2.0M. Where does the 500K diff go?

[pready]

Goodwill

[bendingleconte]

ArcSine, Raphael will record the total assets of $2.5mm on their balance sheets, non-current assets of $800k and current assets of $1.7mm.

To balance, the added $500k of assets will be carried to Shareholder/Owner Equity because they gained no liabilities in the acquisition.

[ArcSine]

ArcSine, Raphael will record the total assets of $2.5mm on their balance sheets, non-current assets of $800k and current assets of $1.7mm.

To balance, the added $500k of assets will be carried to Shareholder/Owner Equity because they gained no liabilities in the acquisition.

Gotcha. I'm familiar with having Goodwill pick up the difference when a collection of assets (constituting a biz) is acquired for an aggregate price that exceeds the sum of their individual FMVs. But here we're going the other way... a bargain purchase, so to speak. In such a case, you're saying the accounting rules are to book the assets at their FVs, with the excess credit going to Equity in some manner, rather than apportioning the purchase price to the assets pro-rata.

If a single asset is acquired for some price that differs from its FV (whatever someone has deemed that to be), it nevertheless goes onto the books at its purchase price. Does the treatment you've prescribed for Raphael's situation come from the fact that it's a collection of assets which, taken together, constitute an ongoing business? Just curious.

(As a side note, it certainly calls into question the reliability of Paris' appraisals, doesn't it? Why would Paris let the collection go for 2.0M, when they presumably could have held an attic sale and collected 2.5M for the whole bunch :)) Thanks!

[morgaine300]

Be careful with this. Acquisitions are an advanced topic, so I can't help with the answer cause I only ever did that stuff in class umpteen years ago. (And try to avoid the subject cause I hate it.) There are different ways to do an acquisition first of all and we really have no info here. The problem didn't ask about it.

I also just tried to look this up. Without having recently had the class, it's a little difficult for me to follow, but it's looking like it could be counted as a gain. It also looks as though this may have been revised in 2007. And that is only if we're following FASB.

So really, unless you've just gotten out of an advanced class fairly recently (or actually work with it), I wouldn't mess with this. Rehmanvohra may be able to chime in on this one.