Parton Corporation acquires 30% of the outstanding voting common shares of the Investee Corporation for $600,000.Parton Corporation acquires the investment in Import Corporation by buying previously issued shares of Import Corporation from other investors. When Parton Corporation acquired 30% of Import Corporation's common shares for $600,000, Import Corporation's total shareholders' equity was $1.5 million.Parton Corporation's cost exceeds the carrying value of the net assets acquired by $150,000 [ $600,000 - (0.30 x $1,500,000)].Parton Corporation may pay this premium because

Question

Quizplus · Accepted Answer

Parton Corporation may pay a premium over the carrying value of Investee Corporation's net assets because the fair values of these assets differ from their carrying values and/or because there may be unrecorded assets (such as trade secrets) that contribute to the value of Investee Corporation. Therefore, the answer is (C) - the fair values of Import's net assets differ from their carrying values and/or unrecorded assets (for example, trade secrets).

Parton Corporation Acquires 30% of the Outstanding Voting Common Shares