Discussion
Following an acquisition, the acquiring firm's balance sheet shows an asset labeled "goodwill."
What form of merger accounting is being used?
Answer: C
Correct answer: Purchase
Goodwill arises only under purchase accounting, where the acquirer records the target’s assets at fair value and books the excess of the price over that value as goodwill. Under the pooling method the two balance sheets were simply added at book value and no goodwill appeared - which is largely why pooling was abolished, since it concealed what had been paid.
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