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 amortized on a yearly basis for financial statement purposes.
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 means that the purchase price is allocated to the assets of the target firm based on their fair market value, which may result in goodwill if the purchase price exceeds the fair market value of the net assets acquired. Goodwill is not amortized but tested for impairment at least annually. The equity of the acquiring firm is not necessarily reduced by the excess of the purchase price over the fair market value of the target firm, as this amount may also be allocated to liabilities or non-controlling interests in the balance sheet. The excess amount paid for the target firm is not recorded as a tangible asset, as it represents the premium paid for the control and strategic benefits of the acquisition.

The Purchase Accounting Method Requires That