Earnings Contingency, In-Process R&D;, Bargain Purchase On January 2, 2012, Fise

Question

Earnings Contingency, In-Process R&D;, Bargain Purchase On January 2, 2012, Fiser, Inc. acquired Vixen Pharmaceuticals for $1 billion cash, in a merger. Vixen had two promising products for treating common infections under review by the U.S. Food and Drug Administration. The balance sheets of Fiser and Vixen, immediately prior to the acquisition, are below. Fair value information appears for Vixen's reported assets and liabilities. in thousands) Current assets Property, plant and equipment Patents Total assets Liabilities Capital stock Retained earnings Total liabilities and equity Fiser, Inc. Vixen Pharmaceuticals Book Value Book Value Fair Value $4,000,000 $160,000 $160,000 4,000,000 8,000,000 400,000 2,400,000 $60,000,000 $8,560,000 $6,560,000 $28,000,000 $6,280,000 $6,280,000 48,000,000 8,000,000 20,000,000 4,000,000 12,000,000 (1,720,000) $60,000,000 $8,560,000 $0.8 billion of the purchase price was allocated to previously unreported in-process research and development attributed to Vixen's products under development. The purchase price was low due to Vixen's poor performance in previous years-Vixen reported a retained earnings deficit of $1.72 billion as of the date of acquisition. To close the deal, Fiser agreed to pay the former owners of Vixen $1.50 for every dollar of total revenue above $40 million reported on sales of Vixen's products over the next two years. This payment, if made at all, would occur at December 31, 2013. Fiser expects that there is only a 30 percent chance the payment will be made, as follows: Total expected revenue on Vixen's products, 2012- 2013 Below $40 million $48 million $64 million Probability 0.70 0.20 0.10 (a) Calculate the present value of the earnout agreement, using a 6.5 percent discount rate. (Round your answer to nearest thousand dollars.) X (in thousands) (b) This acquisition is a bargain purchase. Calculate the gain on acquisition reported by Fiser $ 0 X (in thousands)

Explanation / Answer

All amounts are in $ thousands unless otherwise mentioned

Jan-02 F acquired V Price Cash 1,000,000,000

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