ASC 805-10: Bargain Purchase Gain in Business Combinations & Journal Entries

Posted In | Finance | Accounting Software

In a business combination, a bargain purchase occurs when the fair value of the net assets acquired exceeds the consideration transferred by the acquirer. ASC 805-10, Business Combinations - Overall, provides guidance on accounting for bargain purchase gains in a company's financial statements. This article explains bargain purchase gain transactions under ASC 805-10, along with illustrative journal entries.
 

Understanding Bargain Purchase Gains

A bargain purchase gain arises when an acquirer pays less than the fair value of the net assets it acquires in a business combination. This situation may occur due to various factors, such as a distressed sale or an incorrect estimation of the fair value of the acquired assets and liabilities. Under ASC 805-10, the acquirer must recognize a bargain purchase gain in its income Statement.

 

Key Steps in Accounting for Bargain Purchase Gains under ASC 805-10

1. Determine the fair value of the identifiable assets acquired and the liabilities assumed in the business combination.

2. Calculate the consideration transferred by the acquirer.

3. Assess whether a bargain purchase has occurred by comparing the fair value of the net assets acquired with the consideration transferred.

4. Record the bargain purchase gain in the acquirer's income statement.

 

Journal Entries for Bargain Purchase Gain Transactions

To illustrate the journal entries for a bargain purchase gain transaction, let's assume Company A acquires Company B for $1,000,000. The fair value of Company B's identifiable net assets is $1,200,000.

 

1. Record the acquisition of Company B's identifiable net assets:

Dr. Identifiable Net Assets $1,200,000

Cr. Cash (consideration transferred) $1,000,000

Cr. Bargain Purchase Gain $200,000

 

2. Recognize the bargain purchase gain in Company A's income statement:

Dr. Bargain Purchase Gain $200,000

Cr. Gain on Bargain Purchase $200,000

 

ASC 805-10 provides guidance on accounting for bargain purchase gains in a company's financial statements. By understanding the key steps and journal entries involved in accounting for bargain purchase gains, companies can accurately reflect the financial impact of these transactions in their financial statements. Proper accounting for bargain purchase gains helps maintain transparent financial reporting and enables stakeholders to make informed decisions about a company's financial position and performance.