Mega Corporation acquired 65% of the voting shares of Forko Ltd for €10 billion and used the purchase method of accounting for the merger. Mega Corporation's interest in Forko Ltd had a restated value of €950 million. How should Mega account for the difference?
A)as Gain from Acquisition on the current period income statement
B)as Goodwill on the consolidated balance sheet
C)as a Loss from Merger on the current period income statement
D)as Additional Paid-in Capital on the consolidated balance sheet

Question

Quizplus · Accepted Answer

According to the purchase method of accounting, the acquiring company (Mega Corporation in this case) needs to record the acquired company's (Forko Ltd) assets and liabilities at their fair values. If the acquired company's fair value exceeds the cost of acquisition, the difference is recorded as goodwill. In this case, Mega Corporation acquired Forko Ltd for €10 billion, but its interest had a restated value of €950 million. Therefore, there is a difference of €9.05 billion (€10 billion - €950 million), which would be recorded as goodwill on the consolidated balance sheet. Therefore, the correct answer is B.

Mega Corporation Acquired 65% of the Voting Shares of Forko