Gain from Bargain Purchase

Brief Definition

Gain from bargain purchase occurs when a company acquires another company for less than the fair value of its identifiable net assets. This situation can arise during business combinations where the purchase price is lower than the net fair value of the acquired assets minus liabilities.

Further Explanation

Gain from bargain purchase occurs when a company acquires another company for less than the fair value of its identifiable net assets. This situation can arise during business combinations where the purchase price is lower than the net fair value of the acquired assets minus liabilities. The acquiring company recognizes this difference as a gain on its income statement. It is the opposite of recognizing goodwill, where the purchase price exceeds the fair value of the net assets.

Example:
Company A acquires Company B for $1 million. The fair value of Company B’s identifiable net assets (assets minus liabilities) is $1.2 million. The difference of $200,000 ($1.2 million – $1 million) is recorded as a gain from bargain purchase on Company A’s income statement.