If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree:
A) a gain on bargain purchase results
B) goodwill has been acquired and must be recognised
C) the difference is treated as a special equity reserve in the acquirer's accounting records
D) the difference is treated as a loss and immediately charged to profit or loss of the period in which the business combination occurred.

Question

Quizplus · Accepted Answer

When the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree, the difference is treated as goodwill and must be recognized as an asset on the acquirer's balance sheet. Therefore, choice B is the best option. Choice A is incorrect because a gain on bargain purchase would only arise if the cost of the business combination is less than the net fair value of the identifiable assets, liabilities, and contingent liabilities acquired. Choice C is also incorrect because special equity reserve is not a recognized accounting treatment for this situation. Similarly, choice D is incorrect because a loss would only arise if the net fair value of the identifiable assets, liabilities, and contingent liabilities is greater than the cost of the business combination.

If the Cost of a Business Combination Is Greater Than