Accounting for Fuzzy Dice Inc. Acquisition of Tiny Tots Toys Llc

In: Business and Management

Submitted By VistaMontara
Words 1696
Pages 7
ISSUE: Accounting for Fuzzy Dice Inc. acquisition of Tiny Tots Toys LLC related to decision (1) to use purchased facility to enter another business line or (2) renovate the facility to expand the current production.

BRIEF BACKGROUND OF COMPANY
Fuzzy Dice Inc. (“Fuzzy” or “the Company”) manufactures novelty items that it distributes to wholesalers and large online and direct-mail retailers. Fuzzy operates in an area where several other light manufacturers operate, one of which is Tiny Tots Toys LLC (“Tiny”), an educational children’s toy manufacturer. Tiny has been unable to turn a profit for the past few years and has recently filed for Chapter 11 bankruptcy protection.
Tiny’s primary asset is its manufacturing facility. The location and capabilities of this facility are the key reasons why it represents an acquisition target to Fuzzy. However, Fuzzy is undecided on how it should use Tiny’s factory after the acquisition. The Company will either (1) continue to use the facility to manufacture children’s toys and enter another business line alongside its novelty business or (2) renovate the factory in order to expand its novelty item production capacity to grow its current business. Since the acquisition will be structured as an asset purchase rather than a stock purchase, Fuzzy will not assume the employment relationships with the Tiny employees. In both scenarios, Fuzzy expects to hire all the current Tiny employees; however, the Company believes its current workforce is capable of operating the Tiny facility if necessary.

ACCOUNTING QUESTIONS
1. If Fuzzy decides to operate the factory in its current capacity to manufacture children’s toys, should the transaction be accounted for under ASC 805 as an acquisition of a business or an acquisition of assets?
2. If Fuzzy decides to refurbish the factory to manufacture novelty items, would this affect its…...

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