Earnings Contingency, In$-$Process R&D$,$ Bargain Purchase

On January $2,2012,$ Fiser, Inc. acquired Vixen Pharmaceuticals for $$1\mathrm{.}3$ 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.

Fiser, Inc.Vixen Pharmaceuticals$($in thousands$)$Book ValueBook ValueFair ValueCurrent assets$$6,000,000$$$300,000$$$300,000$Property, plant and equipment$50,000,0009,000,0005,000,000$Patents$10,000,000500,0003,500,000$Total assets$$66,000,000$$$9,800,000$$$8,800,000$Liabilities$$31,000,000$$$8,400,000$$$8,400,000$Capital stock$20,000,0003,550,000$Retained earnings$15,000,000(2,150,000)$Total liabilities and equity$$66,000,000$$$9,800,000$

$$

$$1$ billion of the purchase price was allocated to previously unreported in$-$process research and development attributed to Vixen's products under development. The purchase price was low due to Vixen's poor performance in previous years$$Vixen reported a retained earnings deficit of $$2\mathrm{.}15$ billion as of the date of acquisition. To close the deal, Fiser agreed to pay the former owners of Vixen $$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, $2012-2013$ProbabilityBelow $$50$ million$0\mathrm{.}90$$$60$ million$0\mathrm{.}08$$$80$ million$0\mathrm{.}02$

$$

$($a$)$ Calculate the present value of the earnout agreement, using a $5$ percent discount rate.

$($Round your answer to nearest thousand dollars.$)$

$Answer $1$

$($in thousands$)$

$($b$)$ This acquisition is a bargain purchase. Calculate the gain on acquisition reported by Fiser.

$Answer $2$

$($in thousands$)$

$($c$)$ Prepare the entry Fiser made to record the business combination$($in thousands$).$

General JournalDescriptionDebitCreditCurrent assets

Property, plant and equipment

Patents

In$-$process R&DGain on acquisitionGoodwillCapital StockMerger expenses

Liabilities

Cash

In$-$process R&DGain on acquisitionGoodwillCapital StockMerger expenses

$$

$($d$)$ Prepare Fiser's post$-$combination balance sheet $($in thousands$).$

Fiser, Inc.

Balance Sheet

January $3,2012($in thousands$)$Current assets

Liabilities

Property, plant and equipment

Capital stock

Patents

Retained earnings

In$-$process research & development

Total assets

Total liabilities and equity