Question

Mercury Corporation acquired 100 percent of the stock of Jupiter Company when the book value of Jupiter's net assets was $250,000. The fair value of Jupiter's net assets was $280,000 on the acquisition date.

Based on the preceding information, what amount will be recorded by Mercury as its investment in Jupiter if it paid $275,000 for the acquisition?
A) $250,000
B) $275,000
C) $280,000
D) $300,000

Answer 1

Mercury Corporation will record $275,000 as its investment in Jupiter, which is the actual amount they paid for acquiring 100 percent of the stock, regardless of the book or fair value.

Step-by-step explanation:

When Mercury Corporation acquired 100 percent of the stock of Jupiter Company, the amount that will be recorded by Mercury as its investment in Jupiter will be the actual amount paid for the acquisition, despite Jupiter's book value or fair value on the acquisition date. Therefore, if Mercury Corporation paid $275,000 for the acquisition, despite the book value being $250,000 and the fair value being $280,000, the amount recorded as Mercury's investment in Jupiter will be $275,000. This is in accordance with the cost principle, which dictates that the acquisition of an asset should be recorded at the cost paid regardless of the other valuations at the time of purchase.