Question

Company J acquired all of the outstanding common stock of Company K in exchange for cash. The consideration transferred exceeds the acquisition-date fair value of the net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K?

Answer 1

Answer: The amounts have to be determined using fair value for plant and equipment and for long term debt.

Explanation:

Fair value method is based on the market price of the asset. The historical value of the assets is not used to consider the sale price of the asset. Fair value is where Company J and Company K both the parties have to accept the price based on the known facts of the assets.

Company J and Company K should both accept the price out of free will and should not be out of compulsion. Company J can report based on the financial statement fair value of the assets and long term debt.