The purchase accounting method for mergers 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.
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 and liabilities of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm. This often results in the excess of the purchase price over the fair market value of the target firm being recorded as goodwill, which is not amortized on a yearly basis but is subject to impairment tests. The equity of the acquiring firm is not directly affected by the purchase price, but the issuance of new shares or the incurrence of debt to finance the acquisition may affect it indirectly. The excess amount paid for the target firm is not recorded as a tangible asset but may be included in the goodwill calculation.

The Purchase Accounting Method for Mergers Requires That