Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated financial statements immediately after the acquisition?

Question

Quizplus · Accepted Answer

When a company acquires another company and consolidates its financial statements, the assets and liabilities of the acquired company should be reported at their fair market values on the date of acquisition. This is in accordance with the purchase method of accounting, which is used for business combinations. This approach provides a more accurate reflection of the underlying value of the acquired company's assets and liabilities, and therefore its earnings potential. The previously reported book values may not reflect the fair market values, and nominal estimated values determined by the parent company would not be objective or reliable. Market values on the date of acquisition less accumulated depreciation would also not provide a complete picture of the assets' current values.

Paxton Corporation Acquired All of the Outstanding Voting Stock of Stanley