Under the purchase accounting method of reporting acquisitions:
A) The target ﬁrm's assets are recorded on the balance sheet of the acquiring ﬁrm at the same value at which they were last shown on the balance sheet of the target ﬁrm.
B) Goodwill is recorded in an amount equal to the purchase price less the estimated fair market value of the net assets acquired.
C) The assets, but not the liabilities, of the target ﬁrm are reported on the balance sheet of the acquiring ﬁrm.
D) The balance sheet of the acquiring ﬁrm is increased by an amount equal to the estimated fair market value of the net assets acquired.
E) The ﬁxed assets of both the target ﬁrm and the acquiring ﬁrm are restated at their estimated fair market value.

Question

Quizplus · Accepted Answer

Under the purchase accounting method, goodwill is recorded as the difference between the purchase price and the estimated fair market value of the net assets acquired. This is done in order to reflect the amount paid for intangible assets such as brand name, customer relationships, and intellectual property.

Under the Purchase Accounting Method of Reporting Acquisitions