Respond to
the following prompts. Please type using
a word processing program and bring a printed copy to class. Write as much or as little as you feel
necessary to answer each question to the best of your ability. You may use all available resources to
complete this case – e.g., lecture slides, notes, your book, and the Accounting
Standards Codification. Collaboration
with others in your group is vital. How you work together is up to you – however,
I encourage everyone in the group to take at least some part for both questions.
Please turn in only one finished
assignment for each group. Groups will
be randomly assigned with three or four participants each and can be found on
Canvas. Consider each prompt separately.
For
grading, I will focus primarily on the analysis
and communication that you
provide. There is not necessarily a “right answer” that I
will be looking for and I will not grade based on that your opinion, as long as
it is well-justified and communicated. Instead,
I want to be able to follow your own accounting decision-making clearly and to
be able to not just understand what your conclusion(s) are, but also the
justification.
Rebel Gear Corporation (Rebel)
is a clothing manufacturer and distributor. The company specializes in
college-branded clothing and jewelry.
On August 1, 2018, Rebel
entered into an agreement with Lion Accessories Corporation (Lion) (the
“Agreement”), an unrelated third party that specializes in college-branded
accessories.
Before entering into the
Agreement, Rebel had explored opportunities to dispose of its jewelry line
(Jewelry Line).
Rebel agreed to sell its
Jewelry Line to Lion, and Lion agreed to sell its water bottle line (Water
Bottle Line) to Rebel. In addition, Rebel agreed to pay Lion $6 million, with
$2 million paid at closing and the remainder payable over three annual installments.
”’
Under the terms of the
Agreement, Rebel received specific assets (the “Acquired Set”) directly related
to the manufacture and sale of the Water Bottle Line, namely:
·
Inventory.
·
Tangible
property, including equipment, prototypes, and tools used exclusively in the
Water Bottle Line.
·
Intellectual
property.
·
Customer lists,
vendor lists, market research, and other specified intangible assets. Under the
terms of the Agreement, Rebel did not receive any of the following:
·
Assets not
exclusively used in the manufacture and sale of the Water Bottle Line.
·
Cash or accounts
receivable.
·
Real property.
·
Tax
assets/liabilities, including any net operating losses.
·
Employment
contracts, or otherwise any workforce.
·
Liabilities of
Lion related to the manufacture and sale of the Water Bottle Line originating
before the closing date of the Agreement.
All of the assets in the
Acquired Set are understood to carry more than a nominal value.
Under the Agreement, Rebel was
not provided with a facility at which to manufacture the Water Bottle Line.
Specifically, the facility owned by Lion to manufacture the Water Bottle Line
was not included in the Agreement, but the equipment for the Water Bottle Line
was included. Rebel must obtain a manufacturing facility specifically for the
Water Bottle Line, which is expected to entail significant cost and delay.
Valuation of the Agreement
Before entering into the Agreement, Rebel and Lion
valued their respective product assets and determined that the Water Bottle
Line was valued at $27 million and the Jewelry Line was valued at $21 million.
Rebel’s total cash payment to Lion is determined to be $6 million (the
difference in the two values).
Transition Services, Supply, and Distribution Agreements
Concurrent with the Agreement, Rebel and Lion entered into a
Transition Services Agreement, as well as a Supply Agreement and a Distribution
Agreement (collectively, the “TSA”). Under the terms of the TSA, services that
Lion will provide to Rebel for a period of up to two years from the closing
date of the Agreement include:
·
Certain administrative tasks.
·
At Rebel’s request, Lion will manufacture the Water Bottle Line on
behalf of Rebel for an agreed-upon price per unit. Lion will procure raw
materials from Lion’s third-party suppliers. Rebel will provide sales forecasts
to Lion that will determine the number of units to be manufactured. Rebel must
also submit purchase orders for all purchases to Lion.
·
Regulatory, product engineering, and quality engineering support.
Rebel or Lion may cancel the TSA at any time with 15 days’ notice
with no early termination penalty.
Other Relevant Facts
Shortly after the closing date of the Agreement, Lion terminated
the employment of all (two) Water Bottle Line sales employees. These two
employees were subsequently hired by Rebel and will, along with Rebel’s four
existing sales employees, be responsible for selling the Water Bottle Line.
The TSA, specifically the manufacturing activities component, was
established, in part, to allow Rebel time to obtain a manufacturing facility at
which to produce the Water Bottle Line.
Required:
Does
the Acquired Set meet the definition of a business and thus the acquisition of
the Acquired Set is a business combination? Why or why not?
To access the FASB Accounting Standards Codification (ASC), please use the following link:
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