Publics Company Acquired the Net Assets of Citizen Company During $$\begin{array} { l r } \text { Current assets } & \$ 800,000 \\\text { Noncurrent assets } & \underline { 600,000 } \\& \$ 1,400,000\end{array}$$

question 32

Multiple Choice

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.

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Definitions:

Working Capital

The difference between a company's current assets and current liabilities, indicating the short-term liquidity of the company.

Serial Bonds Payable

Bonds issued by an entity that are scheduled to be repaid in regular installments over a period until the total principal is paid off.

Accounts Payable

Liabilities owed to creditors for goods and services purchased on credit.

Retained Earnings

The portion of a company's profits that is kept or retained rather than paid out as dividends to shareholders, often used for reinvestment in the business.