Final answer:
Consulting, accounting, and legal fees have no effect on goodwill, as they are expenses recognized in the period incurred and not part of the goodwill calculation. Previously unreported lawsuits could potentially increase goodwill if they lead to a decrease in the fair value of the net assets acquired.
Step-by-step explanation:
The question pertains to the accounting treatment involved in a business acquisition when Company P acquires all of the stock of Company S. Specifically, it asks about the effect of consulting, accounting, and legal fees as well as unreported lawsuits on the amount of goodwill recorded in the acquisition. These fees and potential lawsuit liabilities would typically increase the total costs associated with the acquisition but are not part of the goodwill calculation. Goodwill is calculated as the excess of the purchase consideration over the fair value of the net assets acquired. As such, consulting, accounting, and legal fees would decrease the net income or increase expenses in the period they are incurred but would not affect the goodwill amount. However, if the lawsuits represent a contingent liability that was not factored into the purchase price, they might lead to an increase in the goodwill if the fair value of the net assets is adjusted downward post-acquisition. Therefore, the fees would have no effect on goodwill while the previously unreported lawsuits would potentially increase the goodwill, making (3) No effect Increase the correct answer.