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 acquired 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 acquired firm be recorded at their fair market value on the balance sheet of the acquiring firm. This means that the excess of the purchase price over the fair market value of the target firm is allocated to specific assets such as inventory, property, plant and equipment, and intangible assets. Goodwill is also recognized as an asset on the balance sheet but it is not amortized on a yearly basis. The equity of the acquiring firm is not directly impacted by the purchase accounting method. Option A is incorrect because the excess amount paid is not recorded as a one-time expense on the income statement, but rather allocated to assets. Option B is incorrect because goodwill is not amortized annually. Option C is incorrect because the equity of the acquiring firm is not reduced by the excess amount paid for the target firm. Option E is incorrect because the excess amount paid is not recorded as a tangible asset, but rather allocated to specific assets.

The Purchase Accounting Method for Mergers Requires That