HELP!! Purchase price allocation - Seller perspective

[iamcpa]

I'm wondering what the rules are from the seller's perspective on the allocation of the consideration given for the sale of unrelated items in one agreement. The fact pattern is as follows:

Company A decides to outsource its payroll processing to Company B (a Payroll Processor). Under the agreement, Company A will sell the payroll processing assets to Company B. In addition, Company A will create a new company, NewCo. Certain employees and their related accrued PTO ($2M) will be transferred to NewCo. Certain contracts (with associated liabilities totaling $1.2M) will also be transferred to NewCo. NewCo will then be given to Company B. The total purchase price of the assets (the only cash consideration given) is $4M (the net book value of the assets being sold). Company B will take legal responsibility to pay the accrued vacation for the transferred employees and the liabilities of the contracts.

Question: What are the Journal entries for Company A? Is there a need to allocate the $4M cash consideration to ALL the elements in the contract? Or is it simply Dr. Cash 4M, Cr. Assets 4M and for the liabilities Dr. Liability $5.2M, Cr. Gain $5.2M?

Help!!

 

[kirby]

First let's get NewCo straight. Sounds like it has $4MM in Assets and $3.2 MM ( the $2MM PTO and the $1.2MM associated liabilities) in liabilities . Is that right - before we go on?

 

[iamcpa]

First let's get NewCo straight. Sounds like it has $4MM in Assets and $3.2 MM ( the $2MM PTO and the $1.2MM associated liabilities) in liabilities . Is that right - before we go on?

The Assets were not transferred to NewCo. Only the Employees (and associated PTO of $2M and the 1.2M in other liabilities). Sorry for the confusion!

 

[kirby]

Alrightee then - NEWco has $3.2MM in liabilities. So Co A is going to hand this hot potato to Co B, CO B needs some dough, right! So if NEWCO "has no assets" then CO A will have to pay $3.2MM to Co B to take it. (Else why would Co B take it?)

Now that balances and I can see that CO B would accept that. What is NOW unclear is the "$4 million" consideration. I do not see the other $800K.

Also unclear - why would there be any gain on this for CO A? No one is going to take on your liabilities for free, leaving you to declare a gain. That's why Co A MUST be giving B a matching $3.2MM cash.