Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S.corporation for $50,000,000.The net assets of Bevo had a book value of $35,000,000 and a fair value of $46,000,000.How should Canto record the business combination? A.
$\begin{array}{ll}
\text { Net Assets (Bevo) } & 35,000,000 \
\text { Goodwill } & 15,000,000 \
\text { Cash } &&50,000,000
\end{array}$

B.
$\begin{array}{ll}
\text { Net Assets (Bevo) } &46,000,000 \
\text { Goodwill } & 4,000,000 \
\text { Cash } &&50,000,000
\end{array}$

C.
$\begin{array}{ll}
\text { Net Assets (Bevo) } &50,000,000 \
\text { Cash } &&50,000,000
\end{array}$

D.
$\begin{array}{ll}
\text { Net Assets (Bevo) } &46,000,000 \
\text { Goodwill } & 4,000,000 \
\text { Cash } &&50,000,000
\end{array}$
A)Entry A
B)Entry B
C)Entry C
D)Entry D

Question

Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S.corporation for $50,000,000.The net assets of Bevo had a book value of $35,000,000 and a fair value of $46,000,000.How should Canto record the business combination? A. 
$\begin{array}{ll}
\text { Net Assets (Bevo) } & 35,000,000 \
\text { Goodwill } & 15,000,000 \
\text { Cash } &&50,000,000
\end{array}$

B.
$\begin{array}{ll}
\text { Net Assets (Bevo) } &46,000,000 \
\text { Goodwill } & 4,000,000 \
\text { Cash } &&50,000,000
\end{array}$

C.
$\begin{array}{ll}
\text { Net Assets (Bevo) } &50,000,000 \
\text { Cash } &&50,000,000
\end{array}$

D. 
$\begin{array}{ll}
\text { Net Assets (Bevo) } &46,000,000 \
\text { Goodwill } & 4,000,000 \
\text { Cash } &&50,000,000
\end{array}$
A)Entry A
B)Entry B
C)Entry C
D)Entry D

Quizplus · Accepted Answer

Under the acquisition method, the business combination is recorded at the fair value of the consideration transferred, which is $50,000,000 in this case. The excess of the fair value of the net assets acquired over the consideration transferred is recorded as goodwill. Therefore, the journal entry should be as follows:

Cash or other consideration paid:       $50,000,000
     Goodwill:                                          $11,000,000
     Net assets of Bevo:                        $35,000,000

Journal entry B reflects this treatment by recording the cash paid, goodwill, and net assets acquired at their respective values. Entries A, C, and D do not record the goodwill as required under the acquisition method.