Question

In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?
a) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill

b) Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill.

c) Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book value. Excess is allocated to goodwill.

Answer 1

Answer:

The answer is A.

Explanation:

Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill is correct.

This is also the calculation of goodwill. Goodwill is calculated by subtracting fair value of net identifiable net asset o the company that is about to be acquired from its purchase price. If purchase price is higher than net assets of the acquired, then it is a positive goodwill but if the purchase price is lesser than the net assets of the acquired, it is a negative goodwill.