Acquisition Method Impact on Financial Statements

Hard Intercorporate Investments Acquisition Method

Company A acquired Company B in a transaction assessed to be a business combination under the acquisition method. At the acquisition date, Company B’s identifiable assets had a fair value of $500 million and liabilities had a fair value of $300 million. Company A paid $250 million in cash and issued shares worth $300 million to acquire Company B. No goodwill arises from this acquisition. Under the current accounting guidance, which of the following statements is TRUE regarding the impact of the acquisition on Company A's financial statements?

Company A will report a gain of $50 million on its income statement due to the fair value of net assets acquired exceeding the consideration transferred.

The assets and liabilities from Company B will be consolidated into Company A’s financial statements at their fair values, and goodwill will equal zero.

Company A must recognize the contingent liabilities related to Company B at the acquisition date, which may increase the total liabilities on A's balance sheet.

Hint

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