On what premise should management record the land and buildings , i.e., the in- use or in-exchange premise?

On what premise should management record the land and buildings , i.e., the “in- use” or “in-exchange” premise?


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Allfoods Corp. (Allfoods) is a calendar year-end company. On
February 1, 2009,
Allfoods announced that it was acquiring 80 percent of the
outstanding common stock of Baked Beans Corp. (Baked
Beans) in a business combination. On the acquisition date,
Allfoods paid $40 million in cash and issued two million shares
of Allfoods common stock to the selling shareholders of Baked
Beans. All of the outstanding stock options granted to
employees of Baked Beans will be replaced with Allfoods stock
options as required by the merger agreement. Allfoods is
accounting for the transaction in
accordance with ASC 805,
Business Combinations
1. De te rmining Cons ide ration Trans fe rre d
On August 1, 2009, Allfoods acquired Baked Beans. The
Allfoods share price was $30 on the announcement date and $35
on the acquisition date. The parties agreed that Allfoods would
issue the selling shareholders an additional one million shares
if Baked Beans revenues for the 12-month period after the
acquisition were at least $150 million. The fair value of the
contingent consideration was determined to be $20 million as
of the acquisition date. The value of the replacement stock
option awards attributable to precombination services is $5
million, and the portion that relates to postcombination services
is $7 million. Allfoods incurred $4 million of acquisition
related costs.
2. Fair Value of As s ets Acquire d and Liabilitie s As s ume d
Baked Beans owns a manufacturing facility in Chino,
California. The facility is comprised of land, two buildings , and
machinery. There are no other significant assets located at this
facility. The land could be rezoned into a residential subdivision

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for a nominal fee and management has determined that the fair
value of the underlying land as residential property would be
$30 million, after considering costs necessary to prepare it for
use as residential lots (i.e., demolition costs of the building, net
of the fair value of scrap from the building and nonmovable
equipment). The movable equipment (i.e., equipment that could
be sold separately) could be sold at auction for $2 million. The
Chino manufacturing facility (as acquired) is estimated to be
worth $36 million.
Management determined that the individual fair value of the
land being used for industrial purposes is $21 million and that
the fair value of the buildings and machinery as currently
being used (for industrial purposes) is $7 million.
3. Valuation of Intangible As s ets
The in-process research and development (IPR&D), which is
proprietary food freezing technology submitted for Food and
Drug Administration (FDA) approval, has a fair value of $15
million. The company considers its R&D to be in-process
because it has not yet obtained FDA approval and additional
R&D may be required. Allfoods management has determined
that the fair value of the Baked Beans trademark is $3 million,
using a market participants’ viewpoint. Management has also
determined that it will not use the
trademark because it intends to distribute the Baked Beans
products under the Allfoods trademark. Management has also
determined that it will not sell the trademark because it
believes that this could potentially result in new participants
entering the market, thus reducing its market share. No
amounts were recorded in the balance sheet of Baked Beans
for the research and development costs related to their
proprietary freezing

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