The Purchase Accounting Method Requires That

question 15

Multiple Choice

The purchase accounting method requires that:

• A) the excess of the purchase price over the fair market value of the target firm be recorded as a one-time expense on the income statement of the acquiring firm.
• B) goodwill be amortized on a yearly basis for financial statement purposes.
• C) the equity of the acquiring firm be reduced by the excess of the purchase price over the fair market value of the target firm.
• D) the assets of the target firm be recorded at their fair market value on the balance sheet of the acquiring firm.
• E) the excess amount paid for the target firm be recorded as a tangible asset on the books of the acquiring firm.

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Definitions:

Constant Rate

A fixed percentage or value that does not change over a specified period of time, often used in financial formulas to calculate growth or decay.

Retained Earnings

The portion of net income not distributed to shareholders but instead reinvested in the business or used to pay off debt.

Common Equity

Represents the stockholders' equity or the amount available to common shareholders as a portion of the net worth of a company.

Capital Structure

The mixture of debt and equity financing that a company uses to fund its operations and growth.