An excess of the fair value of net assets acquired in a purchase business combin

Question

An excess of the fair value of net assets acquired in a purchase business combination over the price paid (negative goodwill) is:

Applied to reduce noncurrent assets other than marketable securities to zero before a deferred credit may be reported

Applied to a reduction of noncash assets before a deferred credit may be reported

Recognized in the current year income statement as a bargain purchase (ordinary) gain

Reported as a deferred credit and amortized over a maximum period of forty years

Recognized in the current year income statement as an extraordinary gain.

Applied to reduce noncurrent assets other than marketable securities to zero before a deferred credit may be reported

Applied to a reduction of noncash assets before a deferred credit may be reported

Recognized in the current year income statement as a bargain purchase (ordinary) gain

Reported as a deferred credit and amortized over a maximum period of forty years

Recognized in the current year income statement as an extraordinary gain.

Explanation / Answer

When ever a business is purchased below the fair value of assets that are being purchased, it is called bargain purchase or negative goodwill. When ever such happens the gain is recognised straight away in the Profit & Loss account in the respective year.

So, the answer is e. Recognized in the current year income statement as an extraordinary gain

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