A subsidiary was acquired for cash in a business combination on December 31, 2016.The purchase price exceeded the fair value of identifiable net assets.The acquired company owned equipment with a fair value in excess of the book value as of the date of the combination.A consolidated balance sheet prepared on December 31, 2016, would
A)report the excess of the fair value over the book value of the equipment as part of goodwill.
B)report the excess of the fair value over the book value of the equipment as part of the plant and equipment account.
C)reduce retained earnings for the excess of the fair value of the equipment over its book value.
D)make no adjustment for the excess of the fair value of the equipment over book value.Instead, it is an adjustment to expense over the life of the equipment.

Question

A subsidiary was acquired for cash in a business combination on December 31, 2016.The purchase price exceeded the fair value of identifiable net assets.The acquired company owned equipment with a fair value in excess of the book value as of the date of the combination.A consolidated balance sheet prepared on December 31, 2016, would
A)​report the excess of the fair value over the book value of the equipment as part of goodwill.
B)​report the excess of the fair value over the book value of the equipment as part of the plant and equipment account.
C)​reduce retained earnings for the excess of the fair value of the equipment over its book value.
D)​make no adjustment for the excess of the fair value of the equipment over book value.Instead, it is an adjustment to expense over the life of the equipment.

Quizplus · Accepted Answer

In a business combination, the assets acquired are recorded at their fair value at the date of acquisition. Therefore, the excess of the fair value over the book value of the equipment would be reported as part of the plant and equipment account, not as goodwill or an adjustment to retained earnings or expenses over the life of the equipment.

A Subsidiary Was Acquired for Cash in a Business Combination