COST AND FAIR VALUE COMPARED

After assigning fair values to all identifiable assets acquired and liabilities assumed, we compare the
investment cost with the total fair value of identifiable assets less liabilities. If the investment cost
exceeds net fair value, we first assign it to identifi-able net assets according to their fair values and
then assign the excess to goodwill. In some business combinations, the total fair value of identifiable
assets acquired over liabilities assumed may exceed the cost of the acquired company. GAAP [14]
offers accounting procedures to dispose of the excess fair value in this situation. The gain from such
a bargain purchase is recognized as an ordinary gain by the acquirer.
We assign the amounts to the assets and liabilities based on fair values, except for goodwill. We
determine goodwill by subtracting the $1,200,000 fair value of identifiable net assets acquired from
the $1,400,000 purchase price for Sad Company’s net assets.

CASE 2: FAIRVALUEEXCEEDSINVESTMENTCOST (BARGAINPURCHASE)

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:
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 as-sets
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 bil-lion 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. Mor-gan 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.”