Maroons Limited acquired the net assets and contingent liabilities of Lewis Limited for $60 000. Lewis Limited's net assets and contingent liabilities were: total assets $84 000; total liabilities $10 000; and contingent liabilities $12 000. Maroons Limited will record a:
A) goodwill of $2000.
B) gain on bargain purchase of $2000.
C) goodwill of $14 000.
D) gain on bargain purchase of $60 000.

Question

Quizplus · Accepted Answer

When the net assets and contingent liabilities acquired are greater than the cost paid, a gain on bargain purchase is recorded.

In this case, the net assets and contingent liabilities acquired by Maroons Limited were worth $94,000 ($84,000 + $12,000 - $10,000), but they paid only $60,000 for them. Therefore, they will record a gain on bargain purchase of $2,000.

Goodwill is only recorded when the cost paid is greater than the fair value of the net assets acquired. In this case, there is no indication that this is the situation.

Maroons Limited Acquired the Net Assets and Contingent Liabilities of Lewis