Question

In recording the acquisition cost of an entire business, which of the following is true?

1) Goodwill is recorded as the excess of cost over the fair market value of identifiable net assets.
2) Assets are recorded at the seller's book values.
3) Goodwill, if it exists, is never recorded on the balance sheet.
4) Goodwill is recorded as the excess of cost over the book value of identifiable net assets.
5) Goodwill is recorded for the amount of property, plant, and equipment acquired.

Answer 1

Goodwill in the acquisition of a business is recorded as the excess of cost over the fair market value of net assets, and it is included on the balance sheet. Assets are recorded at their fair market values, not the seller's book values.

Step-by-step explanation:

When recording the acquisition cost of an entire business, goodwill is recorded as the excess of cost over the fair market value of identifiable net assets. This means that if the cost of acquiring a business is higher than the fair market value of its net assets, the excess amount is recorded as goodwill.

Assets are not recorded at the seller's book values. Instead, they are recorded at their fair market values as of the date of acquisition.

Therefore, option 1 is true and option 2 is false. Option 3 is also false because if goodwill exists, it is recorded on the balance sheet. Finally, option 4 is true because goodwill is recorded as the excess of cost over the book value of identifiable net assets.