A buyer acquires a target valued at $1 billion with a tangible equity book value of $500 million. What accounts will the $500 million difference be allocated to?

When a buyer acquires a target company for a price higher than its tangible equity book value, the difference between the purchase price and the book value is typically allocated to goodwill and identifiable intangible assets. In this scenario, the target’s valuation is $1 billion, while its tangible equity book value is $500 million. This results in a $500 million difference, which represents the premium the buyer is willing to pay over the net identifiable tangible assets.

Goodwill arises from factors such as brand reputation, customer relationships, employee expertise, and market position, which do not appear on the balance sheet as identifiable intangible assets but contribute to the overall value of the acquired company. Identifyable intangible assets, on the other hand, include things like patents, trademarks, and customer lists that can be separately recognized and valued.

Other choices do not appropriately reflect the accounting standards for mergers and acquisitions. For instance, debt and operational assets would not accurately describe intangible values associated with the acquisition premium, while cash reserves and short-term investments, as well as accrued and current liabilities, do not relate to the excess payment made for the intangible qualities of the acquired entity. Therefore, the correct accounting treatment for the excess purchase price directly links to the creation of goodwill and the recognition of identifiable