Executive Summary The report analyzes three options to record the transfer of the in process research and development project Drug X from Bust-a-Knee to Pharmers. Based on the analysis, we recommend Options #3 as the approach to record the journal entries at the date of transfer. The first option records the acquisition of Drug X and OuchX into an intangible account -- “ownership”. In the case of transfer ownership of the IPR&D of Drug X from Brust-a-Knee to Pharmers, Brust-a-Knee receives $2 million cash and incurred $2 million loss. The disadvantage of treating the $2 million loss into the expense account of Drug X is there may be future economic benefits for Brust-a-Knee to sell Drug X because the estimated revenue is $5.5
Journal entries are shown as follows: Ownership – Drug X $4 million Ownership – Ouch X $3 million Gain from bargain purchase $7 million Bust-a-Knee recognized intangible assets of IPR&D related to Drug X and OuchX. A $4 million and a $3 million debt to ownership should be made into the journal entry to record the acquisition of those two ongoing developments. According to FASB ASC 805, an acquirer will make a gain from bargain purchase when the identifiable net assets acquired exceed the actual amount it pays to the acquiree (FASB, ASC 805-30-25). The value of Drug X and OuchX is not included in the $15 million acquisition payment to MD International. Hence, this value should be treated as a gain from bargain purchase. The third part of the first option is shown as follows: Expense on the development of Drug X $2 million Cash $2 million Ownership $4 million Drug X was originally purchased by Bust-a-Knee at $4 million, and sold to Pharmers at $2 million. There is a $2 million loss in this ownership transaction of IPR&D of Drug X. IPR&D is an intangible asset because it will continuously create value and potential future cash flows. According to FASB ASC 350,