Publics Company acquired the net assets of Citizen Company during 2016.The purchase price was $800,000.On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities, of which the fair value approximated book value.The fair value of Citizen's assets on the acquisition date was as follows:
$$\begin{array} { l r }
\text { Current assets } & \$ 800,000 \
\text { Noncurrent assets } & \underline { 600,000 } \
& \$ 1,400,000
\end{array}$$ How should Publics account for the difference between the fair value of the net assets acquired and the acquisition price of $800,000?
A)Retained earnings should be reduced by $200,000.
B)A $600,000 gain on acquisition of business should be recognized.
C)A $200,000 gain on acquisition of business should be recognized.
D)A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years.

Question

Publics Company acquired the net assets of Citizen Company during 2016.The purchase price was $800,000.On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities, of which the fair value approximated book value.The fair value of Citizen's assets on the acquisition date was as follows:
$$\begin{array} { l r } 
\text { Current assets } & \$ 800,000 \
\text { Noncurrent assets } & \underline { 600,000 } \
& \$ 1,400,000
\end{array}$$ How should Publics account for the difference between the fair value of the net assets acquired and the acquisition price of $800,000?
A)Retained earnings should be reduced by $200,000.
B)A $600,000 gain on acquisition of business should be recognized.
C)A $200,000 gain on acquisition of business should be recognized.
D)A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years.

Quizplus · Accepted Answer

The fair value of Citizen's net assets acquired ($1,000,000) exceeds the purchase price of $800,000. Therefore, a gain on acquisition of business should be recognized by Publics Company. The gain will be equal to the difference between the fair value of net assets acquired and the acquisition price ($1,000,000 - $800,000 = $200,000). This gain should be recognized as a part of the consolidated income statement of Publics Company in the year of acquisition. The gain should not be recognized in retained earnings or reported as a deferred credit.