Durer Inc.acquired Sea Corporation in a business combination and Sea Corp.went out of existence.Sea Corp.developed a patent listed as an asset on Sea Corp.'s books at the patent office filing cost.In recording the combination,
A)fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp.
B)Sea Corp.'s prior expenses to develop the patent are recorded as an asset by Durer at purchase.
C)the patent is recorded as an asset at fair market value.
D)the patent's market value increases goodwill.

Question

Quizplus · Accepted Answer

In a business combination, the assets acquired are recorded at their fair market value, which includes intangible assets like patents. Even if Sea Corp. expensed the research and development costs related to the patent, its fair market value must still be determined at the acquisition date, and this value is then recorded as an asset by Durer. Option A is not correct because the fact that the research and development costs are expensed by Sea Corp. does not preclude the recognition of an asset by Durer. Option B is incorrect because the prior expenses are irrelevant to the determination of fair market value. Option D is incorrect because an increase in market value does not translate to goodwill, which is only recognized when the purchase price exceeds the fair market value of net identifiable assets acquired.

Durer IncAcquired Sea Corporation in a Business Combination and Sea Corp