Assume that Brave Pharmaceuticals acquired Tangent Therapeutics at the end of 2022. This acquisition was accomplished by paying a total of $900,000,000 in cash to acquire all 10 million shares of Tangent's outstanding common stock from Tangent's shareholders. This purchase price of $90 per share represented a 40% premium over Tangent's share price immediately prior to the acquisition.

Below is information on the fair market value (at the time of the acquisition) and historical cost (as listed on Tangent's pre-acquisition balance sheet) for all of the separately identifiable assets and liabilities acquired from Tangent:

Account Name Fair Market Value

Historical Cost (on Tangent's Pre-Acquisition Balance Sheet)

Inventory $ 15,000,000 $ 10,000,000
Intangible Assets $ 200,000,000 $0
Property, Plant, and Equipment $ 20,000,000 $ 10,000,000
Current Liabilities $ 5,000,000 $ 5,000,000
Notes Payable $ 20,000,000 $ 20,000,000

How will the Intangible Assets (other than goodwill) of Tangent be recorded in the journal entry that Brave will make at the time of the acquisition:

Question

Assume that Brave Pharmaceuticals acquired Tangent Therapeutics at the end of 2022.    This acquisition was accomplished by paying a total of $900,000,000 in cash to acquire all 10 million shares of Tangent's outstanding common stock from Tangent's shareholders.  This purchase price of $90 per share represented a 40% premium over Tangent's share price immediately prior to the acquisition.

Below is information on the fair market value (at the time of the acquisition) and historical cost (as listed on Tangent's pre-acquisition balance sheet) for all of the separately identifiable assets and liabilities acquired from Tangent:

Account Name	Fair Market Value

Historical Cost (on Tangent's Pre-Acquisition Balance Sheet)

Inventory	$ 15,000,000	$ 10,000,000
Intangible Assets	$ 200,000,000	$0
Property, Plant, and Equipment	$ 20,000,000	$ 10,000,000
Current Liabilities	$ 5,000,000	$ 5,000,000
Notes Payable	$ 20,000,000	$ 20,000,000

How will the Intangible Assets (other than goodwill) of Tangent be recorded in the journal entry that Brave will make at the time of the acquisition:

BlackTom AI · Accepted Answer

The question asks how the identifiable intangible assets (other than goodwill) of Tangent will be recorded in Brave’s acquisition journal entry.

Option A: 'Brave will debit Intangible Assets for $200,000,000.' This aligns with the accounting principle that identifiable intangible assets acquired in a business combination are recognized at their fair market value at the acquisition date. Tangent has intangible assets with a fair market value of $200,000,000, so Brave would record these assets at that amount as a debit. The debit increases the identifiable intangible assets on Brave’s books to reflect the acquired assets at fair value.

Option B: 'Brave will credit Intangible Assets for $200,000,000.' A credit to Intangible Assets would decrease an asset account, which is inappropriate here because Brave is acquiring Tangent and acquiring identifiable intangible assets at fair value. There is an asset increase (debit), not a decrease (credit), when recognizing identifiable intangibles.

Option C: 'Brave is not permitted to record the Intangible Assets of Tangent.' This is incorrect because in a business combination Brave must recognize all identifiable assets acquired and liabilities assumed at their fair values, including the identifiable intangible assets. There is no prohibition on recognizing these assets; the only potential limitation would be on recognizing non-identifiable elements like goodwill, which is handled separately.

Further context: In a purchase method (acquisition method) of accounting for a business combination, identifiable assets and liabilities are recorded at their fair values at the acquisition date. The total consideration paid (here $900,000,000) is allocated to identifiable assets and liabilities based on their fair values, with the remainder allocated to goodwill. The inventory, PPE, and liabilities would also be recorded or adjusted to their fair values, with any excess of purchase price over the net identifiable assets becoming goodwill. The crucial point for Tangent’s intangible assets (other than goodwill) is the recognition at fair value, which is $200,000,000 in this scenario.

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