What is the accounting treatment for the $3 million placed in an escrow account after acquiring Pluto Company?

When an acquiring company places funds in an escrow account as part of a merger or acquisition deal, these funds are typically considered restricted cash. This is because the funds are set aside for a specific purpose, such as to cover potential liabilities or claims that may arise post-acquisition. Restricted cash is reported on the balance sheet but is not available for general use by the company until the restrictions are lifted or the conditions surrounding the escrow are met.

Classifying the $3 million as restricted cash provides a clearer picture of the company's liquidity and financial standing, as it separates these funds from the company's readily accessible resources. This distinction is important for stakeholders who review the financial statements, as it indicates that these funds are not available for operational or investment activities.

In this context, the other options do not align with standard accounting principles regarding escrow arrangements. For instance, classifying it as an expense immediately would misrepresent the financial position, as the funds are not an expense incurred during the period but rather an allocation of cash for future contingencies. Recording it as a contingent asset would also be inappropriate since the funds are not yet realizable as an asset; their availability depends on future events. Lastly, not recording it until payout is made fails to recognize the existence of the cash