The purchase accounting method requires that:
A) The excess of the purchase price over the fair market value of the target ﬁrm be recorded as a one-time expense on the income statement of the acquiring ﬁrm.
B) Goodwill be included as a current liability.
C) The equity of the acquiring ﬁrm be reduced by the excess of the purchase price over the fair market value of the target ﬁrm.
D) The assets of the target ﬁrm be recorded at their fair market value on the balance sheet of the acquiring ﬁrm.
E) The excess amount paid for the target ﬁrm be recorded as a tangible asset on the books of the acquiring ﬁrm.

Question

Quizplus · Accepted Answer

The purchase accounting method requires that the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm. This is done in order to accurately reflect the value of the acquired assets and liabilities on the acquiring firm's balance sheet. The excess of the purchase price over the fair market value of the target firm is recorded as goodwill, which is an intangible asset, on the acquiring firm's balance sheet.

The Purchase Accounting Method Requires That