Question

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. the $100,000 should be

1. Allocated on a pro rate basis to the nonmonetary assets acquired.

2. Capitalized as part of goodwill and tested annually for impairment.

3. Capitalized as another asset and amortized over 5 years.

4. Expensed as incurred in the current period.

Answer 1

Answer : option ( D )

Explanation :

Choice "b " is incorrect. The difference between the fair value of the net assets acquired and the amount paid for the business is recorded as a gain by the acquirer at the time of the acquisition and would not be recorded as negative goodwill in the statement of financial position by the acquirer.

Choice"c" is incorrect. Goodwill is not recognized in the statement of financial position in a bargain purchase but is recognized in the statement of financial position of the acquirer when the amount paid for the net assets exceeds the fair of the net assets acquired.

Choice"a " is incorrect. In a bargain purchase where the fair value of the net assets acquired is more than the consideration exchanged for the net assets, the difference is recognized as a gain by the acquirer at the time of the acquisition, not as a deferred gain that is amortized into earnings over the estimated futureperiods benefited.