Question

St. Sebastian Company and A. Jamison Company were combined in a purchase transaction. St. Sebastian was able to acquire Jamison at a bargain price. The fair market value of Jamison's net assets exceeded the price paid by St. Sebastian to acquire the company. Proper accounting treatment by St. Sebastian is to report the excess fair value over purchase price as ____________.

Answer 1

The St. Sebastian Company should report the excess of fair market value over the purchase price as a gain on a bargain purchase on the income statement according to accounting standards.

Step-by-step explanation:

When St. Sebastian Company acquires A. Jamison Company at a bargain price, and the fair market value of Jamison's net assets exceeds the price paid, the proper accounting treatment for St. Sebastian is to report this excess of fair value over purchase price as a gain on a bargain purchase in the income statement. This concept follows the accounting standards that require recognition of the gains when the assets acquired in a business combination are greater in value than the cost of the acquisition.

These accounting standards include the Generally Accepted Accounting Principles (GAAP) in the United States and the International Financial Reporting Standards (IFRS). It is essential to note that the gain on a bargain purchase is not operational income and should be presented separately to ensure the financial statements appropriately reflect the nature of the transaction.