(***Excerpt from problem set***) “Williams Company acquired 50% of the 200,000 shares of Continental Supply Company at the beginning of 2008. Continental Supply Company is a separate operating company jointly controled, after the acquision, by Williams Company (50%), National Oilfield (35%), and Hanson Company (15%), with none of the joint ventures individually having control of Continental Supply.Williams Company bought shares of Continental Supply Company for an amount considerably greater than book value. Assume that the fair values of Continental Supply’s identifiable assets were worth $2,400,000 more than their book values and that the liabilities were fairly stated. Assume also that Williams paid $4,000,000 in excess of the fair value of the net assets. Assume that at the beginning of 2009, Williams Company decides to transfer its investment in Continental Supply to a separate entity, Ricky Company. Williams creates Ricky to hold the continental Supply stock, to acquire other similar investments, and to operate a pipeline that it plans to build. It transfers the 100,000 shares of Continental Supply that it owns but no other assets. Ricky sells half its share os Continental Supply to National Oilfield, giving National Oilfield a 60% interest in Continental Supply. Which of the following best reflects the accounting for this transaction? A. The amount paid in excess of the fair value of the net assets is accounted for as goodwill. In accordance with long-standing accounting practice, this goodwill is tested for impairment at least annually or amortized over its useful life. B. The difference between the fair value and book value of the identifiable assets is depreciated or amortized over the useful lives of the assets. C. If Williams had actually paid less than book value for the shares, the difference would be first allocated to long-term assets and any remaining difference would be treated as an extraordinary loss.” Here’s the answer: The answer is B. The explaination is that “If, in a business combination accounted for by the purchase method of accounting, as excess amount over the book value of the net assets acquired is paid, that amount, up to the fair value of the net assets, is amortized over the useful lives of the various assets to which the fair value increments are applied.” How would you know to use the purchase method? Why isn’t A a good answer?

I think A is not correct because goodwill will just be tested for impairment. Goodwill will not be amortized over its useful life.

You would know it isnt A because as previous posted said, you dont amortize goodwill. Also, I think you know it isnt C because if they had purchased it below BV then it would be a gain if anything (I didnt check if this was US GAAP or IFRS in the question, but either way…if it WAS US GAAP it would be a gain, not loss).