Grant Company acquired Lee Company for $600,000 cash. The fair value of Lee's assets was $520,000, and the company had $40,000 in liabilities. Which of the following choices would reflect the acquisition on the horizontal financial statements model?

Question

Quizplus · Accepted Answer

Option D reflects the correct accounting treatment for the acquisition. The purchase price of $600,000 is recorded as an outflow of cash, and the fair value of Lee's assets of $520,000 is recorded as an inflow of assets. The excess purchase price over the fair value of the assets, which is $80,000 ($600,000 - $520,000), is recorded as goodwill. The liabilities of $40,000 are also recorded as an outflow of cash. This treatment follows the principles of the acquisition method of accounting which requires the acquirer to record the fair value of assets acquired and liabilities assumed.

Grant Company Acquired Lee Company for $600,000 Cash