Question

During 2021, Blossom Company purchased the net assets of Ayayai Corporation for $2178000. On the date of the transaction, Ayayai had $594000 of liabilities. The fair value of Ayayai's assets when acquired were as follows: Current assets $1069200 Noncurrent assets 2494800 $3564000 How should the $792000 difference between the fair value of the net assets acquired ($2970000) and the cost ($2178000) be accounted for by Blossom

Answer 1

When the purchase price is lower than the fair market value, accountants generally refer to this as negative goodwill. All negative goodwill must be reported as a gain.

the net fair market value of assets = $1,069,200 + $2,494,800 - $594,000 = $2,970,000

gain = fair market value - purchase price = $2,970,000 - $2,178,000 = $792,000

Another way to refer to this type of situation is a bargain purchase.