Problem
Space Corp (owned by Charles) has grown steadily via internal expansions, since Space Corp's incorporation.
In mid of 2014,Charles hired two engineering students. The students created their own company, Tech Inc, which owned the students' patent they created that would make certain aspects of Charles's company Space Corp run more efficiently. Charles negotiated with the students and came up with the results:
Space Corp would not buy shares of Tech Inc. Instead, Space Corp would buy the assets and take the liabilities of Tech Inc starting on January 1, 2015.
• Purchase price is payable as described:
• $400,000 on Jan 1, 2015
• $200,000 per year for three years starting on January 1, 2016.
• The two students would work for Space Corp as consultants for the next three years, receiving $50/hr
|
|
Carrying Amount
|
Fair Value
|
|
Computer Equipment
|
$60,000
|
$70,000
|
|
Patent Registration Costs
|
50,000
|
?
|
|
Current Assets
|
100,000
|
100,000
|
|
|
210,000
|
|
|
Shareholders' Equity
|
190,000
|
?
|
|
Liabilities
|
20,000
|
20,000
|
|
|
210,000
|
|
Charles was satisfied with the agreement. He also appreciated the option to pay the students over three years; this save him from having to take out a bank loan with an 8% interest rate to pay them.
Charles now has difficulty in the accounting of his business Space Corp. Space Corp always followed IFRS but Charles wondered if he should adopt a simpler method. Charles wondered if IFRS would let the purchase of Tech Inc be allocated to goodwill. This would help avoid income charges over the first few years since goodwill isn't amortized. If the acquisition differential is allocated to the patent, then Charles would like to write off the patent over the maximum period of 20 years.
Task
Give recommendations that relate to Charle's issues and concerns. Support the recommendations using financial statement concepts. Show calculation to show the impact on profit for 2015. State assumptions you made (if any).