Discussion
The PEN Corporation with a book value of $20 million and a market value of $30 million has merged with the CNC Corporation with a book value of $6 million and a market value of $8 million at a price of $9 million. If the transaction is a purchase then the total assets on the books of the new company will be:
Answer: B
Correct answer: $29 million
Under purchase accounting the acquirer’s own assets stay at book value; only the target’s are restated. So the total is PEN’s $20 million at book, plus CNC’s $8 million at fair value, plus $1 million of goodwill, giving $29 million. The $26 million option is what pooling would have given, adding the two book values, and the difference between the two figures is the whole of the accounting argument.
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