Purchase Price Allocation Interview Case

Reviewed by Fallon Han· Updated 2026-05-22 18:50:07.914

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I am a Master's student in accounting at a UK university and I am preparing for transaction advisory interviews in Manchester. I want a post-deal accounting scenario that really tests technical depth. Can you run a realistic case on purchase price allocation after an acquisition? I want the kind of question that would challenge me on fair value adjustments, goodwill, and the accounting impact in the first year after completion.

Absolutely. Here is a realistic post-deal case. A UK buyer acquires a target on 1 July for 120 million pounds. At completion, the target's book equity is 45 million pounds. During due diligence, you identify the following fair value adjustments: - Customer relationships: 12 million pounds, useful life 6 years - Brand name: 8 million pounds, useful life 4 years - Inventory uplift: 3 million pounds, expected to be sold within 3 months - Property fair value uplift: 5 million pounds, remaining useful life 20 years - Contingent liability: recognize 2 million pounds at fair value The buyer also incurs 1.2 million pounds of legal and advisory fees, and the target had 0.8 million pounds of deferred revenue recorded at book value that remains unchanged at completion. Your tasks are to explain: how you would calculate goodwill, what entries are needed at acquisition, and what the post-completion P and L impacts would be in the first year. I would also expect you to discuss deferred tax effects and any accounting judgment around the contingent liability.

My first step would be to identify consideration transferred and the fair value of net assets acquired. Since book equity is 45 million, I would adjust that for the fair value uplift items and the contingent liability. I think goodwill would be consideration less fair value of net identifiable assets, but I am not fully sure how to treat the deferred revenue and the acquisition costs. Could you walk me through what I should be saying in an interview?

Good approach. In an interview, I would want you to be structured and precise. Start with goodwill: - Consideration transferred: 120 million pounds - Fair value of net identifiable assets acquired is not simply book equity plus uplifts. You need to adjust the book balances to fair value and then include deferred tax effects where relevant. From the facts, the uplift items are: - Customer relationships: 12 million - Brand: 8 million - Inventory: 3 million - Property: 5 million - Contingent liability: negative 2 million in net assets That gives gross fair value adjustments of 26 million pounds, before tax. If the tax rate is 25 percent, the temporary differences on the intangible and property uplifts will create deferred tax liabilities. The inventory uplift is usually a short-term timing difference, but it still needs reviewing for tax treatment. In an interview, you should say deferred tax must be recognized on taxable temporary differences arising on acquisition, which reduces net assets and increases goodwill. The deferred revenue needs careful treatment. If the performance obligation remains outstanding, the acquired liability is usually measured based on the fair value of the obligation, not just the book amount. If the book amount already reflects the remaining obligation fairly, you may keep it at 0.8 million. It is not an uplift item in the same way as an asset. Acquisition costs of 1.2 million pounds are expensed in the income statement, not capitalized into goodwill. For the first-year P and L impact after completion, highlight: - Amortization of customer relationships: 12 divided by 6 equals 2 million pounds per year - Amortization of brand: 8 divided by 4 equals 2 million pounds per year - Depreciation on property uplift: 5 divided by 20 equals 0.25 million pounds per year - Inventory uplift: 3 million pounds will flow through cost of sales when sold, likely within the first quarter - Deferred tax on these temporary differences will also create tax expense or benefit depending on movement A strong interview answer would end by saying goodwill is the balancing figure after considering all fair value adjustments and deferred tax, and that the P and L impact in year one is mainly amortization, depreciation, inventory step-up release, and deferred tax, while acquisition-related fees hit operating expenses immediately.

That helps. If I were asked to calculate goodwill on the spot, how should I present the steps clearly without getting lost? And how do I explain why the contingent liability increases goodwill rather than reduces it?

Use a simple three-step structure. Step 1: Start with consideration transferred. - Say the purchase price is 120 million pounds. Step 2: Build fair value net assets. - Take book equity of 45 million pounds. - Add fair value uplifts for assets: customer relationships 12, brand 8, inventory 3, property 5. - Subtract the fair value of the contingent liability: 2 million. - Then adjust for deferred tax liabilities on the uplifted assets. Step 3: Goodwill is the residual. - Goodwill = consideration minus fair value net assets. On the contingent liability point, explain it like this: - A contingent liability recognized at fair value is a liability acquired in the business combination. - Liabilities reduce the net assets acquired. - Since goodwill is the excess of purchase price over net assets, a recognized liability lowers net assets and therefore increases goodwill. A polished line for interview use would be: - Recognition of the contingent liability reduces the fair value of identifiable net assets acquired, so it mechanically increases goodwill as the balancing figure. One more thing: if the interviewer pushes on judgment, mention that contingent liabilities are recognized at fair value at acquisition even if the probability of outflow is less than 50 percent, as long as the fair value can be measured reliably. That shows technical depth.

Could you help me with how the first-year journal entries would look in a simplified way? I want to be able to talk through the opening balance sheet adjustments and then the recurring post-acquisition impacts.

Yes. Keep it simplified and narrate the logic. At acquisition date, the entries are conceptually: - Dr Identifiable assets acquired at fair value, including the uplifted intangible assets, property, and inventory - Dr Goodwill for the balancing amount - Cr Liabilities assumed, including deferred revenue and the contingent liability - Cr Cash or consideration payable for 120 million pounds For deferred tax, you would also recognize: - Cr Deferred tax liability on taxable temporary differences arising from the fair value uplifts For the acquisition costs: - Dr Administrative or deal expenses - Cr Cash or payables For first-year recurring impacts: - Dr Amortization expense, Cr Accumulated amortization, for customer relationships and brand - Dr Depreciation expense, Cr Accumulated depreciation, for property uplift - Dr Cost of sales, Cr Inventory, when the stepped-up inventory is sold - Dr Tax expense, Cr Deferred tax liability or current tax, depending on the movement If you want to sound interview-ready, say that the opening balance sheet reflects acquisition-date fair values, while the post-completion P and L reflects only the subsequent consumption of those fair value adjustments. That distinction is important in transaction advisory because clients often mix up deal-time accounting with ongoing earnings effects.

What would a strong final answer sound like if the interviewer asks me to summarize the accounting implications for management? I want to sound commercial, not just technical.

A strong summary would sound like this: The acquisition creates a meaningful goodwill balance because the consideration exceeds the fair value of the identifiable net assets, especially once the fair value of acquired intangibles and the contingent liability are included. In year one, earnings will be affected by amortization of the customer relationships and brand, depreciation on the property uplift, and a one-off cost of sales impact when the stepped-up inventory is sold. Transaction fees do not form part of goodwill and are expensed as incurred, so they reduce profit immediately. We also need to recognize deferred tax on the temporary differences created by the fair value adjustments, which affects the tax line and future reversals. If you want to sound commercial, add: - Management should expect lower reported earnings post-acquisition due to purchase accounting, even if the deal is strategically value accretive. - The key focus is separating accounting noise from underlying performance. - Investors and lenders will likely adjust for amortization and acquisition costs when assessing run-rate profitability. That combination of technical accuracy and business impact is exactly what a Big Four interviewer in Manchester would like to hear.