During 2011, Bond Company purchased the net assets of May Corporation for $1,000,000.On the date of the transaction, May had $300,000 of liabilities.The fair value of May's assets when acquired were as follows: How should the $500,000 difference between the fair value of the net assets acquired ($1,500,000) and the cost ($1,000,000) be accounted for by Bond?

Question

During 2011, Bond Company purchased the net assets of May Corporation for $1,000,000.On the date of the transaction, May had $300,000 of liabilities.The fair value of May's assets when acquired were as follows:  How should the $500,000 difference between the fair value of the net assets acquired ($1,500,000) and the cost ($1,000,000) be accounted for by Bond?

Quizplus · Accepted Answer

The $500,000 difference between the fair value of net assets acquired and the cost should be recognized as a gain, since the purchase price is less than the fair value of the net assets acquired. This is in accordance with the accounting principle of bargain purchase. Therefore, option B is the correct answer. Option A is incorrect because the gain should not be credited to retained earnings. Option C is incorrect because the fair value of each asset should be recorded separately, and not grouped together as current and noncurrent assets. Option D is incorrect because a deferred credit should only be set up if the purchase price is more than the fair value of the net assets acquired.

During 2011, Bond Company Purchased the Net Assets of May