Publics Company acquired the net assets of Citizen Company during 20X5. The purchase price was $800,000. On the date of the transaction, Citizen had no long-term investments in marketable equity securities and $400,000 in liabilities. The fair value of Citizen assets on the acquisition date was as follows: $\begin{array}{ll}
\text { Current assets } & \$ 800,000 \
\text { Noncurrent assets } & 600,000 \
&\$1,400,000
\end{array}$ How should Publics account for the $200,000 difference between the fair value of the net assets acquired, $1,000,000, and the cost, $800,000?
A) Retained earnings should be reduced by $200,000.
B) Current assets should be recorded at $685,000 and noncurrent assets recorded at $515,000.
C) A $200,000 gain on acquisition of business should be recognized
D) A deferred credit of $200,000 should be set up and subsequently amortized to future net income over a period not to exceed 40 years.

Question

Quizplus · Accepted Answer

The $200,000 difference represents a gain on acquisition, often referred to as a "bargain purchase," and should be recognized as a gain in the income statement.