On December 31, 20X1, Oak Corporation acquired 100 percent ownership of Cherry Corporation. On that date, Cherry reported assets and liabilities with books values of $450,000 and $200,000, respectively, common stock outstanding of $150,000, and retained earnings of $100,000. The book values and fair values of Cherry's assets and liabilities were identical except for land which had increased in value by $15,000 and inventories which had decreased by $5,000.
-Company X acquires 100 percent of the voting shares of Company Y for $275,000 on December 31,20X8.The fair value of the net assets of Company X at the date of acquisition was $300,000.This is an example of a(n):
A) positive differential.
B) bargain purchase.
C) extraordinary loss.
D) revaluation adjustment.

Question

Quizplus · Accepted Answer

The fair value of the net assets of Cherry Corporation is $460,000 ($450,000 + $15,000 - $5,000), but Oak Corporation acquired it for an undisclosed amount. Therefore, no information is available to determine whether the acquisition resulted in a positive differential or a bargain purchase.

However, in the case of Company X acquiring 100 percent of Company Y, the fair value of the net assets of Company Y is less than the purchase price of $275,000, indicating a bargain purchase. An extraordinary loss and revaluation adjustment are not applicable in this scenario.

On December 31, 20X1, Oak Corporation Acquired 100 Percent Ownership