Question

An acquired company's assets all have fair values greater than book values. When compared with an acquisition with goodwill, an acquisition reported as a bargain purchase generally results in:

1) Higher net income in the first year
2) Higher net income in subsequent years
3) Higher total assets
4) Higher total liabilities

Answer 1

An acquisition reported as a bargain purchase generally results in higher net income in the first year, higher net income in subsequent years, higher total assets, but not higher total liabilities.

Step-by-step explanation:

An acquisition reported as a bargain purchase generally results in:

1. Higher net income in the first year: When an acquiring company purchases a target company at a bargain price, the fair values of the acquired company's assets are greater than their book values. This leads to a higher net income in the first year because the acquiring company can recognize a gain on the difference between the fair value and the book value of the acquired assets.
   
   
2. Higher net income in subsequent years: If the acquired company's assets retain their fair value advantage over book value in subsequent years, the acquiring company may continue to recognize gains that result in higher net income in those years as well.
   
   
3. Higher total assets: A bargain purchase implies that the acquired company's assets are undervalued on its books. Therefore, when the acquisition is reported, the total assets of the acquiring company will increase to reflect the fair values of the acquired company's assets.
   
   
4. Higher total liabilities: A bargain purchase does not necessarily result in higher total liabilities. The liabilities of the acquired company are recorded at their book values, and there is no immediate impact on the total liabilities of the acquiring company.