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.

	Fiser, Inc.	Vixen Pharmaceuticals
(in thousands)	Book Value	Book Value	Fair Value
Current assets	$4,000,000	$160,000	$160,000
Property, plant and equipment	48,000,000	8,000,000	4,000,000
Patents	8,000,000	400,000	2,400,000
Total assets	$60,000,000	$8,560,000	$6,560,000
Liabilities	$28,000,000	$6,280,000	$6,280,000
Capital stock	20,000,000	4,000,000
Retained earnings	12,000,000	(1,720,000)
Total liabilities and equity	$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 yearsVixen 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	Probability
Below $40 million	0.70
$48 million	0.20
$64 million	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.)

$Answer

(in thousands)

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

$Answer

(in thousands) (c) Prepare the entry Fiser made to record the acquisition (in thousands).

General Journal
Description	Debit	Credit
Current assets	Answer	Answer
Property, plant and equipment	Answer	Answer
Patents	Answer	Answer
AnswerIn-process R&DGain on acquisitionGoodwillCapital StockMerger expenses	Answer	Answer
Liabilities	Answer	Answer
Cash	Answer	Answer
AnswerIn-process R&DGain on acquisitionGoodwillCapital StockMerger expenses	Answer	Answer

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

Fiser, Inc. Balance Sheet January 3, 2012
(in thousands)
Current assets	$Answer	Liabilities	$Answer
Property, plant and equipment	Answer	Capital stock	Answer
Patents	Answer	Retained earnings	Answer
In-process research & development	Answer
Total assets	$Answer	Total liabilities and equity	$Answer