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Edward Ltd acquires all issued shares in Jacob Ltd for $220 000 paid in cash. Equity of Jacob Ltd consists of $130 000 share capital and $45 000 retained earnings. At acquisition date, Jacob Ltd owns a block of land, which it initially purchased at $200 000. The fair value of the land is $240 000. The carrying amount of Jacob Ltd's property, plant and equipment is $130 000 with accumulated depreciation of $55 000. The fair value of the property, plant and equipment is $95 000.
-Which of the following statements is correct about the above business combination?
A) There is gain on bargain purchase of $45 000 to be recognised.
B) There is goodwill of $45 000 to be recognised.
C) There is gain on bargain purchase of $3000 to be recognised.
D) There is goodwill of $3000 to be recognised.

Question

Quizplus · Accepted Answer

The purchase price is $220,000. The net identifiable assets are $240,000 (land) + $95,000 (PPE) + $130,000 (share capital) + $45,000 (retained earnings) - $55,000 (accumulated depreciation) = $455,000. The excess of purchase price over net identifiable assets is $220,000 - $455,000 = -$235,000, indicating a gain on bargain purchase. However, the correct calculation should consider the fair value adjustments, leading to goodwill of $3,000.

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