Bargain Purchase is a term used in accounting and finance to refer to a situation in which a company acquires another company for a price that is lower than the fair value of the acquired company’s net assets. This can occur when the acquired company is facing financial difficulties or has a lower market value than its net assets.
In accounting, a bargain purchase is recorded as a gain on the acquiring company’s income statement. The gain is calculated as the difference between the acquisition price and the fair value of the acquired company’s net assets.
The formula for calculating the gain on a bargain purchase is as follows:
Gain on Bargain Purchase = Acquisition Price – Fair Value of Acquired Company’s Net Assets
For example, consider a company with the following financial information:
Acquisition Price: $500,000
Fair Value of Acquired Company’s Net Assets: $800,000
The company would recognize a gain of $300,000 on the acquisition, as the acquisition price is lower than the fair value of the acquired company’s net assets.
There are a few key points to keep in mind when it comes to bargain purchases:
They occur when a company acquires another company for a price that is lower than the fair value of the acquired company’s net assets.