Journal Entry for Gain on Bargain Purchase
A bargain purchase is an accounting term used to describe a situation where the acquirer purchases the acquiree’s shares for an amount less than the net assets’ fair value.
Business acquisition is the process of one company purchasing another company. The process can be complex, it usually involves some degree of negotiation between the two parties. Acquisitions can be a way for companies to grow quickly, as they can gain access to new markets and customers. They can also be a way for companies to quickly expand their product offerings.
In some cases, acquisitions can also be a defensive move, designed to prevent a competitor from gaining a market share in a particular market.
Acquisition activity often picks up during periods of economic growth, as companies look to take advantage of increasing demand. However, acquisitions can also be made during times of economic uncertainty, as companies look to consolidate their operations and reduce costs.
In accounting, the gain on a bargain purchase is recorded when the fair value of the net assets acquired is greater than the consideration paid. The amount of the gain is equal to the excess of the fair value over the consideration paid.
The gain on bargain purchases is recorded in the income statement. The purpose of recording the gain on bargain purchases is to provide accurate financial statements that reflect the true economic position of the company.
Bargain purchases often occur when a company acquires another company at a discounted price. The discount may be due to many factors, including unfavorable market conditions, regulatory problems, or financial difficulties experienced by the seller. In some cases, the seller may be forced to sell the business at a discount in order to avoid bankruptcy. When a company acquires another company at a bargain price, it is important to carefully consider all of the risks and opportunities associated with the transaction before proceeding.
Journal Entry for Gain on Bargaining Purchase
Acquirer is the company that purchases another company. The acquiree is the company that has been purchased by the acquirer.
After the purchase, the acquirer will require to record the acquiree’s net assets in contrast to the cash payment. So when the fair value of net assets is higher than the consideration, it will create a gain on the bargaining purchase.
The journal entry is debiting Acquiree’s net assets and credit cash, gain on bargaining purchase.
|Acquiree’s Net Assets||000|
|Gain on Bargaining Purchase||000|
The acquiree’s Net Assets are measured based on the fair value, not the book value. Cash paid depends on the consideration. If the acquirer purchases less than 100% share, we need to include the minority interest value as well.
Company ABC is purchasing the company XYZ. Both parties agree to sell and purchase for $ 80 million for 100% shares. The fair value of XYZ’s net assets is $ 100 million as on the acquisition date. Please prepare journal entry of gain on bargaining purchase.
ABC purchase the total shares of XYZ for $ 80 million while the fair value of net assets is $ 100 million. ABC receives more net assets value than the amount it pay for. it will generate the gain on bargaining purchase.
Gain on Bargain Purchase = $ 100 million – $ 80 million = $ 20 million
The journal entry is debiting XYZ’s Net Assets $ 100 million and Credit Cash $ 80 million, Gain on Bargain Purchase $ 20 million.
|XYZ’s Net Assets||100,000,000|
|Gain on Bargaining Purchase||20,000,000|