In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?
A) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill.
B) Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill.
C) Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill.
D) Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill.

Question

Quizplus · Accepted Answer

In the acquisition method, the acquiring company accounts for its investment by revaluing the net assets of the acquired company to their fair values at the acquisition date. Any excess of consideration transferred over the fair value of net assets acquired is allocated to goodwill. Therefore, option A is the correct statement. Option B and C are incorrect as they do not apply the fair value concept. Option D is incorrect as not all acquired long-term assets are revalued, only the ones that fall under the scope of revaluation rules.

In a Transaction Accounted for Using the Acquisition Method Where