Earlier this year, Lorenzo Corporation acquired 90% of Plainview Company in a share-for-share exchange. The price paid exceeded the fair value of Plainview’s identifiable net assets. Which of the following statements about Lorenzo’s consolidated financial statements is most correct?
a. The current ratio will be higher under the full goodwill acquisition method.
b. Net profit margin will be lower under the partial goodwill acquisition method.
c. Shareholders’ equity will be higher under the full goodwill acquisition method.

Solution

To evaluate the statements regarding Lorenzo Corporation’s acquisition of 90% of Plainview Company, let’s analyze each option in light of the accounting principles related to business combinations, particularly focusing on the full goodwill and partial goodwill methods.

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