Question

"A parent owns 85% of a subsidiary's voting stock, in an acquisition accounted for as a bargain purchase. The subsidiary had previously unreported identifiable intangible assets valued at $10,000,000 on the date of acquisition. Which statement is TRUE concerning consolidation eliminations at the date of acquisition?

a) The identifiable intangible assets should be fully eliminated from the consolidated financial statements.
b) The identifiable intangible assets should be included in the consolidated financial statements at their fair value.
c) Bargain purchase gains are not allowed under accounting standards, and thus, no adjustments are needed.
d) The consolidated financial statements will reflect only the parent's share (85%) of the identifiable intangible assets."

Answer 1

The identifiable intangible assets from a subsidiary in a bargain purchase acquisition should be included in consolidated financial statements at their fair value. Option b) stating that the assets should be valued at fair value is correct. Full consolidation requires recognizing 100% of the identifiable assets at fair value, not just the parent's share.

Step-by-step explanation:

When considering a parent company that owns 85% of a subsidiary's voting stock in an acquisition accounted for as a bargain purchase, and the subsidiary had previously unreported identifiable intangible assets valued at $10,000,000 on the date of acquisition, the correct treatment for consolidation purposes is that the identifiable intangible assets should be included in the consolidated financial statements at their fair value. This means that option b) is the true statement. In such a case, the whole amount of the identifiable intangible assets, not just the parent’s share, are recognized in the consolidated statements at fair value, even if the acquisition is a bargain purchase. This is in accordance with the acquisition method of accounting for business combinations as prescribed by financial accounting standards such as the International Financial Reporting Standards (IFRS 3) and the Generally Accepted Accounting Principles (GAAP).