Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Universal Software, Inc., a publicly held company, is a software developer of a wide range of business applications programs. Universal serves the materials-management needs of

Universal Software, Inc., a publicly held company, is a software developer of a wide range of business applications programs. Universal serves the materials-management needs of all major industries, including manufacturers, distributors, health care, financial institutions, and transportation. Its primary products are software for purchasing, materials control, inventory management, and financial modeling and forecasting. Revenues increased 15 percent in the prior fiscal year ending December 31, 2003, and compound earnings growth exceeded 20 percent in each of the last three years. Universals stock currently trades at a multiple of 35 times current earnings.

In early December 2004, Universal acquired the net assets of Ozark Software for $120 million. Universal purchased Ozark for its technology and business applications products. In accordance with the purchase method of accounting, Universal allocated $64 million of the purchase price to the tangible assets acquired and $20 million to the liabilities assumed. Universal allocated the remainder, $76 million, to the identifiable intangible assets acquired, primarily purchased in process research and development. The sum of the tangible and identifiable intangible assets acquired less liabilities assumed exceeded the purchase price, hence Universal did not record any goodwill.

The valuation of tangible and intangible assets was based on an independent appraisal by a nationally recognized firm. The purchased in-process research and development was appraised at /$65 million through the application of a discounted income approach. Projected debt-free income, consisting of revenues less operation expenses, income taxes, and returns on assets, was discounted to a present value amount.

Universal is very concerned that with its stock trading at such a high multiple of earnings, any disappointment in future reported earnings could severely impact its stock price. Due to this concern, Universal concluded that it would certainly be better not to charge the $65 million of purchased in-process research and development against future earnings. Therefore, Universal decided to take a one-time fourth quarter 2004 charge of $65 million for the write-off of the purchased in-process research and development.

Required:

1. Discuss whether Universals allocation of $65 million to purchased in-process research and development might be a way to avoid recording goodwill. Include in your discussion reasons why Universal might want to avoid recording goodwill.or why they might actually prefer to record goodwill.

2. Discuss whether it is appropriate for Universal to write off the entire amount allocated to the purchased in-process research and development in 2004. Include in your discussion a recommendation as to how Universal should account for the purchased in-process research and development and the basis for your recommendation.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Current Issues In Auditing Fraternity Modern Auditing And Auditors Issues

Authors: Nancy Myle

1st Edition

B0BCSDPYMD, 979-8849756974

More Books

Students also viewed these Accounting questions

Question

love of humour, often as a device to lighten the occasion;

Answered: 1 week ago

Question

orderliness, patience and seeing a task through;

Answered: 1 week ago

Question

well defined status and roles (class distinctions);

Answered: 1 week ago