Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r }
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $500 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following correctly describes the accounting procedures that will arise as a result of the business combination?

Question

Rose Ltd acquired all the equity of Jeannie Ltd on 1 July 20X3.At that time the fair value/financial position of Jeannie was as follows:
$$\begin{array} { l r } 
\text { Capital } & \$ 500000 \
\text { Reserves } & \$ 100000 \
\text { Retained profits } & \$ 150000 \
\text { Liabilities } & \$ 50000
\end{array}$$
Rose paid $500 000 for the shares in Jeannie.
In the 20X3-4 financial year, Jeannie made $75 000 in profits.
Which of the following correctly describes the accounting procedures that will arise as a result of the business combination?

Quizplus · Accepted Answer

A bargain purchase arises when the fair value of the net assets acquired is higher than the purchase consideration paid. In this case, the fair value of net assets is $750,000 ($500,000 + $100,000 + $150,000 - $50,000), and the purchase consideration paid is $500,000, resulting in a bargain purchase gain of $250,000. The Rose Group will record this gain on its consolidation worksheet prepared as at 30 June 20X4. Option B is incorrect as the gain needs to be recorded in the consolidation worksheet, not in Rose Ltd's ledger. Option C is incorrect as goodwill is only recorded if the purchase consideration paid is higher than the fair value of net assets acquired.

Rose Ltd Acquired All the Equity of Jeannie Ltd on 1