How is real estate recorded in purchase accounting?

In purchase accounting, real estate involved in a merger or acquisition is recorded at fair market value determined by a third-party appraisal. This approach is in line with the principle of fair value measurement established in accounting standards, such as the Financial Accounting Standards Board (FASB) guidelines. The rationale for utilizing fair market value is that it reflects the current economic conditions and the situation of the market at the time of the acquisition, providing a more accurate representation of the asset's worth than historical costs or book values.

This method ensures that the acquiring entity recognizes the true value of the real estate asset relative to its potential for generating future cash flows. It also plays a crucial role in allocating the purchase price to various tangible and intangible assets acquired in the transaction. The involvement of a third-party appraisal adds credibility and objectivity to the valuation process, which is essential for financial reporting and compliance purposes.

Considering the other choices, acquisition cost and book value do not reflect current market conditions, making them less suitable for this purpose. Replacement cost may indicate how much it would cost to replace the asset, but it does not necessarily equate to its market value in an acquisition context. Hence, recording real estate at fair market value as determined by a third party is the most