Recognizing Gain on Bargain Purchase and Goodwill in Business Acquisition

What does Mary Limited need to recognize on acquisition?

A. Gain on bargain purchase $10,000
B. Gain on bargain purchase $170,000
C. Goodwill of $10,000
D. Goodwill of $10,000

Answer:

Mary Limited needs to recognize a gain on bargain purchase of $170,000 and goodwill of $10,000.

On acquisition, Mary Limited is required to recognize a gain on bargain purchase and goodwill in the business combination. A gain on bargain purchase occurs when the acquisition price is less than the fair value of the identifiable assets and liabilities acquired.

In this case, Mary Limited acquired the identifiable assets and liabilities of Joan Limited for $530,000. The items acquired, stated at fair value, include equipment worth $296,000, inventories valued at $160,000, accounts receivable totaling $104,000, and patents valued at $60,000. Conversely, accounts payable amount to $80,000.

As a result, Mary Limited needs to recognize a gain on bargain purchase of $170,000, which represents the excess of the acquisition price over the fair value of the assets and liabilities acquired. Additionally, goodwill of $10,000 should be recognized as well.

Goodwill represents the premium paid in an acquisition over the fair value of the net assets acquired. It reflects intangible assets such as the company's reputation, customer relationships, and brand value.

In conclusion, Mary Limited's recognition of the gain on bargain purchase and goodwill is essential in reflecting the financial impact of the business combination.