What is the correct method of treating an acquisition differential arising from a Preferred Share Issue?

A) It should be treated as an adjustment to goodwill.
B) It should be pro-rated across the subsidiary's identifiable assets and liabilities.
C) It should be expensed in the current year.
D) It should be adjusted to a contributed surplus or retained earnings account.

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Shely Varela · Accepted Answer

Final Answer : D, Explanation :  The correct method of treating an acquisition differential arising from a Preferred Share Issue is to adjust it to a contributed surplus or retained earnings account. This is because the excess amount paid for the preferred shares represents a contribution by the shareholders, which should not be recognized as goodwill or expensed in the current year. As a result, the excess amount should be recorded as a non-operating transaction in the contributed surplus or retained earnings account, and may be available for future distribution as dividends or other forms of shareholder returns.

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