ACC 6020 Module 2 Acquisition Method Written Assignment Example

Allocating $8 Million: Fair Values, Unrecorded Intangibles and Goodwill in Ridgewood's Acquisition of Lakeland

Student Name

M.S. in Management in Accounting, Thomas Edison State University

ACC-6020: Advanced Accounting

Mentor Name

Month Day, Year

Allocating $8 Million: Fair Values, Unrecorded Intangibles and Goodwill in Ridgewood's Acquisition of Lakeland

Introduction

The buyer books every identifiable item of the target at its closing-date fair value, even items the target never put on its own books, and only the remainder becomes goodwill (Jeter & Chaney, 2011). The allocation matters for years afterward, because each fair value step-up on a depreciable or amortizable asset becomes an expense in consolidated income.

Lakeland's Balance Sheet at Book and Fair Value

Lakeland's equity at book value is $3,700,000: common stock of $1,000,000 and retained earnings of $2,700,000.

Recognizing Intangibles Not on Lakeland's Books

Lakeland developed its sensor patents internally and expensed the research, so they appear nowhere on its balance sheet. An intangible earns its own line, apart from goodwill, when a contract or law creates it or when it could be sold or licensed without the rest of the business. The patents meet the legal criterion. Lakeland's relationships with its three largest instrument customers, under multiyear supply agreements, meet the contractual criterion. Lakeland's engineers and technicians pass neither test, since no contract ties them to the firm and nobody could sell them on their own, so whatever they are worth stays in goodwill (Financial Accounting Standards Board [FASB], 2007).

The Allocation Schedule

In 2026, the excess will produce $360,000 of additional expense in consolidated income: $150,000 of cost of goods sold as the stepped-up inventory is sold, $60,000 of depreciation, $100,000 of patent amortization and $50,000 of customer relationship amortization.

Each step-up follows its asset: the inventory amount is expensed as the goods are sold, depreciable assets are expensed over their remaining lives and goodwill stays until it is impaired.

A Measurement Period Adjustment

In April 2026, an appraisal completed after closing showed that Lakeland's land was worth $960,000, not $900,000, based on facts that existed at the acquisition date. Adjustments within the measurement period, which can last up to one year, revise the acquisition-date amounts: land increases by $60,000 and goodwill decreases by $60,000, to $2,040,000. The adjustment is recognized in the period it is determined, with any effect on earnings recorded in that period rather than by restating prior statements. Had the land's value changed because of events after closing, such as a new highway, the change would not adjust goodwill.

The measurement period ends when the acquirer obtains the information it was seeking about facts at the acquisition date, and never later than one year after it. Since a 2015 FASB update, adjustments are recorded in the period they are identified rather than by restating earlier statements, with disclosure of the amounts that would have affected prior periods.

Entries on the Acquisition Date

Lakeland's books are unchanged because the purchase was a transaction between Ridgewood and Lakeland's former shareholders. The fair value adjustments live in the consolidation worksheet, a point Module 3 develops. Shalev (2009) found that investors responded to how acquirers disclosed their purchase price allocations, which suggests the schedule above is read as closely as the price itself.

Taxes would add one more layer in practice. Because Ridgewood bought shares, the step-ups are not deductible for tax, so the consolidated balance sheet would also show a deferred tax liability on them, which in turn increases goodwill; the course problem leaves taxes out so that the allocation itself stays clear.

References

Financial Accounting Standards Board. (2007). Business combinations (Statement of Financial Accounting Standards No. 141, revised 2007).

Jeter, D. C., & Chaney, P. K. (2011). Advanced accounting (5th ed.). John Wiley & Sons.

Shalev, R. (2009). The information content of business combination disclosure level. The Accounting Review, 84(1), 239-270. https://doi.org/10.2308/accr.2009.84.1.239