What does bargain purchase gain mean on the CPA exam?
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Bargain purchase gain. The gain recognized when identifiable net assets acquired exceed what was paid. It is recognized in income only after everything has been remeasured and confirmed.
Defined against ASC 805-30-25-2.
Worked example
A buyer pays $8,000,000 in cash for 100% of a family business whose owners had to sell quickly. At the acquisition date the identifiable assets have a fair value of $13,500,000 and the liabilities assumed $4,700,000. Before recording anything, the buyer goes back over every asset, every liability and the consideration to confirm each was identified and measured correctly, and the amounts hold.
What does the buyer recognize from the purchase?
| Identifiable net assets at fair value13,500,000 - 4,700,000 | 8,800,000 |
| Consideration transferred | 8,000,000 |
| Bargain purchase gain: net assets above what was paid8,800,000 - 8,000,000 | 800,000 |
Answer: No goodwill, and an $800,000 gain recorded in income when control passes. The assets and liabilities stay at their full fair values.
The trap: Recording negative goodwill, or shaving the $800,000 off the acquired assets so that nothing shows as a gain. Once the review confirms the measurements, the excess goes to earnings, and the reason for the low price, here a forced sale, is disclosed.
Based on ASC 805-30-25-2; ASC 805-30-30-1.
Which CPA exam sections use bargain purchase gain?
Bargain purchase gain appears in the BAR section of the CPA exam.
Related terms
- recognized gain: The part of realized gain that actually goes on the return this year.
- net capital gain: Net long-term capital gain minus net short-term capital loss.
- net assets: Assets less liabilities.
- goodwill: An asset representing the future economic benefits of acquired assets not separately identified, measured as consideration less identifiable net assets.
- treasury stock: A company's own shares reacquired and not retired.
- liabilities assumed: Obligations the acquirer takes on as part of a combination.