FAIR VALUE EXCEEDS INVESTMENT COST (BARGAIN PURCHASE)
Pit Corporation issues 40,000 shares of its $10 par common stock with a market value of $20 per share, and it also gives a 10 percent, five year note payable for $200,000 for the net assets of Sad Company. Pit’s books record the Pit/Sad business combination on December 27, 2011, with the following journal entries:
|
Investment in Sad Company (+A) |
1,000 |
|
Common stock, $10 par (+SE) |
400 |
|
Additional paid in capital (+SE) |
400 |
|
10% Note payable (+L) |
200 |
|
To record issuance of 40,00 0 shares of $10 par common stock plus a $200,000, 10% note in a business combination with Sad Company. |
|
|
Cash (+A) |
50 |
|
Net receivables (+A) |
140 |
|
Inventories (+A) |
250 |
|
Land (+A) |
100 |
|
Buildings (+A) |
500 |
|
Equipment (+A) |
350 |
|
Patents (+A) |
50 |
|
Accounts payable (+L) |
60 |
|
Notes payable (+L) |
135 |
|
Other liabilities (+L) |
45 |
|
Investment in Sad Company ( A) |
1,000 |
|
Gain from bargain purchase (Ga, +SE) |
200 |
|
To assign the cost of Sad Company to identifiable assets acquired and liabilities assumed on the basis of their fair values and to recognize the gain from a bargain purchase. |
|
We assign fair values to the individual asset and liability accounts in this entry in accordance with GAAP provisions for an acquisition .[15] The $1,200,000 fair value of the identifiable net assets acquired exceeds the $1,000,000 purchase price by $200,000, so Pit recognizes a $200,000 gain from a bargain purchase.
Bargain purchases are infrequent, but may occur even for very large corporations. Two notable transactions related to the sub prime mortgage crisis in U.S. financial markets were reported in the Wall Street Journal in early 2008. “ Bank of America offered an all stock deal valued at $4 billion for Countrywide – a fraction of the company’s $24 billion market value a year ago. Pushed to the brink of collapse by the mortgage crisis, Bear Stearns Cos. agreed – after prodding by the federal government – to be sold to J.P. Morgan Chase & Co. for the fire sale price of $2 a share in stock, or about $236 million. Bear Stearns had a stock market value of about $3.5 billion as of Friday – and was worth $20 billion in January 2007.”