C is corrent because the combination must be accounted for as an acquisition. The following diagram shows the accounting treatment of the excess:
Any amount paid in excess of BV to the extent
of FV will be treated as a revaluation of the equipment.
A is incorrect because no gain is recognized at the date of combination when the FV of equipment is in excess of book value. Thus, retained earnings would not be affected.
B is incorrect because a deferred credit cannot arise from an excess of FV over book value. Deferred credits arise from an excess of FV over the amount paid.
D is incorrect because goodwill results from an excess of the amount paid over the FV, not from an excess of the FV over the book value.
