Big Company acquired the following assets and liabilities of Little Company (fair values listed below)for $470,000 cash.

Assuming these items are all recorded at their acquisition date fair values,what additional item needs to be recorded and how will it be accounted for in the future?

Question

Big Company acquired the following assets and liabilities of Little Company (fair values listed below)for $470,000 cash.

Assuming these items are all recorded at their acquisition date fair values,what additional item needs to be recorded and how will it be accounted for in the future?

Quizplus · Accepted Answer

The fair value of net identifiable assets acquired is $500,000 ($260,000 + $150,000 + $60,000 + $30,000). As the purchase price of $470,000 is less than the fair value of net identifiable assets, there is a bargain purchase. Therefore, the additional item that needs to be recorded is goodwill, which represents the excess of the purchase price over the fair value of net identifiable assets acquired. Goodwill should be capitalized as an asset and tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. Option A is the best choice.

Big Company Acquired the Following Assets and Liabilities of Little