How is negative goodwill treated under the acquisition method?
A) The acquiring company will report a gain on acquisition.
B) The acquiring company will report a loss on acquisition.
C) The negative goodwill will be included in other comprehensive income, as it is essentially an unrealized gain.
D)The negative goodwill is prorated using the fair values of the acquired company's net assets.

Question

Quizplus · Accepted Answer

Negative goodwill arises when the price paid for an acquisition is less than the fair value of the acquired company's net assets. Under the acquisition method, the acquiring company recognizes the fair value of the acquired company's net assets and any excess is recognized as goodwill. When the price paid is less than the fair value of the net assets, a negative amount of goodwill arises. In this case, the acquiring company recognizes a gain on acquisition, as it has acquired assets at a price that is lower than their fair value.

How Is Negative Goodwill Treated Under the Acquisition Method