The correct answer is: B. Adjustment is required in the books of the transferor company.
Mutual indebtedness between the transferor company and the transferee company is a situation where the two companies owe money to each other. This can happen, for example, if the transferor company has sold goods to the transferee company on credit.
When there is mutual indebtedness, the fair value of the net assets transferred must be adjusted to reflect the amount of the debt. This is because the transferee company is effectively acquiring the net assets of the transferor company, including its debts.
The adjustment is made by deducting the amount of the debt from the fair value of the net assets transferred. This results in a lower fair value for the net assets transferred, which is then used to calculate the purchase price.
For example, assume that the transferor company has net assets with a fair value of $100,000. The transferor company also owes the transferee company $20,000. The fair value of the net assets transferred is therefore $80,000.
The purchase price will be based on the fair value of the net assets transferred, which is $80,000 in this example. The transferor company will record a gain of $20,000 on the sale of the net assets.
The transferee company will record a liability of $20,000 for the debt owed to the transferor company. The transferee company will also record an asset of $80,000 for the net assets acquired.
The adjustment for mutual indebtedness is required to ensure that the fair value of the net assets transferred is accurately reflected in the financial statements of both the transferor company and the transferee company.