B. Prepare the journal entry to eliminate the investment account and allocate any difference between fair value and purchase price

On February 23, 2005, eBay acquired Viva Group, Inc., which does business under the name Rent.com, for a cash purchase price of approximately $435.365 million including net cash and investments of approximately $18 million. Rent.com is an Internet listing website in the apartment and rental housing industry. The motivation for the acquisition was to help expand eBay’s presence into the online real estate market. Also, $2 million in estimated acquisition-related expenses were incurred. The acquisition was treated as a nontaxable purchase transaction and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date, as follows:

The estimated useful economic lives of the identifiable intangible assets acquired in the Rent.com acquisition are six years for the customer list, five years for the trade name, three years for the developed technology, and one year for the user base.

Required:

A. Record the acquisition of Rent.comon eBay’s books (including the acquisition-related costs). (Assume that the net tangible assets of 18,050 equals the book value of Rent.com.)

B. Prepare the journal entry to eliminate the investment account and allocate any difference between fair value and purchase price.

C. Record any amortization of intangibles assuming that the cost basis is used by eBay (assume a full year of amortization for all intangibles). Where are these entries recorded?

Would your answer change if the complete equity method were used?

D. Is it likely in the first year that earnings per share will be dilutive or accretive?

SOLUTION

The footnotes describing the acquisition do not disclose the book value of the acquisition, but only report how the purchase price was allocated. Thus one option is to assume that the cash and investments mentioned specifically (i.e. $18,050) represent the only recorded net assets on the books of Rent.com, and thus equal the book value of equity for Rent.com. We have chosen this assumption in the solution reported below. Other assumptions, however, may clearly be justified.

A. Journal entry for the acquisition of Rent.com

Investment in Rent.com 435,365

Acquisition-related expenses 2,000

Cash 437,365

B. Worksheet eliminating entry. (The book value of rent.com is assumed to be equal to the cash and investment amount of $18,050.)

Beginning retained earnings (Rent.com)