Strategically Record a Business Acquisition
You are the controller for Rosie Company. Rosie has just acquired another company and it is your job to allocate the $10 million overall purchase price to the specific items acquired. The following is a list of the items to which the purchase price must be allocated along with two possible allocations:
|
Item |
Accounting Treatment |
Allocation 1 |
Allocation 2 |
|
In process R&D |
Immediate expense |
$ 500,000 |
$5,000,000 |
|
Building |
Depreciation life of 15 to 25 years |
4,000,000 |
2,000,000 |
|
Machinery |
Depreciation life of 3 to 10 years |
5,500,000 |
3,000,000 |
Rosie Company’s CEO, who has absolutely no personal ethics, has instructed you to allocate the purchase price to show big earnings growth in the next few years. The CEO doesn’t care what earnings are reported this year because any losses can be blamed on the effort to integrate the newly acquired company. The CEO also wants your allocation to give the company maximum flexibility to manage earnings to show consistently increasing earnings in future years. Which allocation, 1 or 2, and which depreciation lives for the building and machinery should you choose to accomplish the CEO’s directive? (Ignore income tax considerations.) What concerns should you have about this request?