On January 2, 2012, Fiser, Inc. acquired Vixen Pharmaceuticals for $1.25 billion cash, in a statutory merger.

Question:

On January 2, 2012, Fiser, Inc. acquired Vixen Pharmaceuticals for $1.25 billion cash, in a statutory 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.

$1 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 $2.15 billion as of the date of acquisition. To close the deal, Fiser agreed to pay the former owners of Vixen $2 for every dollar of total revenue above $50 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 10 percent chance the payment will be made, as follows:
Total expected revenue on Vixen's products, 2012 - 2013Probability
Below $50 million ............................................................. 0.90
$60 million ..................................................................... 0.08
$80 million ..................................................................... 0.02
Required
a. Calculate the present value of the earnout agreement, using a 5 percent discount rate.
b. This acquisition is a bargain purchase. Calculate the gain on acquisition reported by Fiser.
c. Prepare the entry Fiser made to record the acquisition.
d. Prepare Fiser's post-combination balance sheet.