BIO Company is a private company. It employs 30 engineers and scientists who are involved with research

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BIO Company is a private company. It employs 30 engineers and scientists who are involved with research and development of various biomedical devices. All of the engineers and scientists are highly regarded and highly paid in the field of biomedical research. BIO is 50% owned by Rod Smart, who started the company in Year 3, and 50% owned by a group of venture capitalists who contributed $10 million of equity capital in Year 4 to fund the R & D activity of the group.
On January 1, Year 6, REX Ltd., a public company listed on the TSX Venture Exchange, acquired 100% of the shares of BIO by issuing 5 million of its own shares. Its shares were trading at $4 per share on the date of this transaction.
The balance sheet for BIO on January 1, Year 6, was as follows:
Cash and marketable securities ........ $2,500,000
Property, plant, and equipment—net ...... 800,000
Development costs ............. 3,000,000
$6,300,000
Liabilities ................ $ 900,000
Common shares ............. 10,100,000
Deficit .................. (4,700,000)
$6,300,000
The cash, marketable securities, property, plant and equipment, and liabilities have fair values equal to carrying amounts. Prior to Year 5, all of the research and development costs were expensed. Starting in Year 5, the developments costs were capitalized because the management of BIO felt that they were getting close to patenting some of their products.
The management of REX is aware that BIO will need to be included in REX's consolidated financial statements. Management has the following questions related to these consolidated financial statements:
Required:
(a) Will any part of the acquisition cost be allocated to BIO's skilled workers? If so, how will this asset be measured, and how will it be amortized or checked for impairment on an annual basis?
(b) Will any part of the acquisition cost be allocated to identifiable intangible assets? If so, how will this asset be measured, and how will it be amortized or checked for impairment on an annual basis?
(c) How much of the purchase price will be recognized as goodwill, and how will goodwill be evaluated for impairment on an annual basis?
Goodwill
Goodwill is an important concept and terminology in accounting which means good reputation. The word goodwill is used at various places in accounting but it is recognized only at the time of a business combination. There are generally two types of...
Intangible Assets
An intangible asset is a resource controlled by an entity without physical substance. Unlike other assets, an intangible asset has no physical existence and you cannot touch it.Types of Intangible Assets and ExamplesSome examples are patented...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
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Modern Advanced Accounting In Canada

ISBN: 9781259066481

7th Edition

Authors: Hilton Murray, Herauf Darrell

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