Accounting treatment of gains on bargain purchases
Bargain purchase occurs when a company buys an asset for less than its fair value in the market. This bargain purchase is also called negative goodwill. So it is a transaction that arises when a business must be sold because of the reasons like liquidity crises where the business does not have the liquid assets that are necessary to meet its short term obligations for example repayment of loans and paying bills. A bargain purchase is recorded as a gain in earnings in the period of acquisition (an asset of object obtained). But historically such bargain purchases were not clear in the financial statements until SFAS No. 141 introduced such shortcomings under Business Combinations. Previously, whenever the transaction of the amount by which fair value of net assets acquired exceeded the purchase price occurred, the term negative goodwill was used to reduce
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No gain on the transaction was recorded unless and until the amount of the bargain purchase exceeded the fair value. It was difficult to value the assets and those valued assets were reduced to zero and gains were recorded for any remaining bargain purchase amount. But when SFAS No. 141 introduced new version, the negative goodwill allocation was referred as bargain purchase amount where the entire bargain-purchase amount is reported as gain in the income statement and is treated as a component of earnings before extraordinary items. In addition the business firms that involve bargain-purchase gains increases its earnings since those bargains are not to be used to reduce the valuations of the assets but to be valued at higher amounts. Also disclosures made by the firms for business combinations provides deep understanding in the effects of bargain purchase transactions in financial statement. Such disclosures provides answer to question like Why would a firm’s management willing to sell a business for a purchase
However, making the purchase before year-end would be unethical and have a significant impact on the Income Statement. The purchase would increase cost of goods sold (COGS) by $200,000, sales revenue on the other hand, would be unaffected. The increase would lower the gross profit. A lower gross profit decreases the amount of income tax, but also lowers net income by $160,000. The impact on the income would result in a lower Net income and a higher cost of goods sold. The retained earnings on the Balance Sheet would decrease. To compare the outcome of each decision (See Summary & Journal). (Accounting Coach COGS and I/S
According to FASB Accounting Standards Codification, “If the carry amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess” (35-11). For example, if the acquisitioned company’s fair value was $1 million and net identifiable assets is $1.2 million and we already had goodwill of $300,000 from previous acquisitions and equipment of $300,000; what would we do to record impairment? Since fair value is below carry amount we recognize the impairment, we add our equipment and subtract our current goodwill to get implied fair value which would be 1 million. Then we find the difference between our implied and carry amount ($200,000) and that is our goodwill left. Finally, when we recognize our loss in our journal entry’s we would record a loss of $100,000 of goodwill to adjust it in our financial statements. Some accounts such as property plant and equipment can be tested for impairment and it can be reversed. However, a reversal of an impairment loss on goodwill is prohibited under US GAAP
Best Buy was founded on technological advancement which at a time when people were not conversant with technology. The company identified this niche and capitalized on helping people with electronics. Consequently, the company realized that consumers were willing to pay in return of technical advice on their equipments. Greek Squad was the technical wing that was and is to date designated to customizing electronic equipments to customer specifications. In this case, technology comes hand in hand with the social aspect of the consumers wanting to keep up with the latest technology.
Under Armour’s target market is consumers that are involved in physical activities. The demographic age groups that they cater to varies from youth to adults. Their products can with stand any weather condition from cold weather to warm weather, which means their product can be used in any geographic location. These consumers can be either light user like walkers or heavy users like football players.
A1: Dollar General's main business strategy is to focus on being the leading distributors of consumable basics, with 30% of the merchandise at $1.00 or less. Dollar General believes in maintaining an assortment of consumable merchandise and making shopping for everyday items hassle free and simplistic.
Chang, S. Suk, D. Failed takeovers, methods of payment, and bidder returns, Financial Review. 33 (2), May 1998.
Retail stores and websites compete with each other every year on Black Friday and Cyber Monday to see who will offer the best deals and sell the most product. Customers will find different stores to shop at if the deals don’t appeal to them as much. It seems to me that over the years, stores like Best Buy, Wal-Mart, and Amazon have always competed for more customers by trying to offer the best Black Friday prices. Personally, I have found that Best Buy significantly discounts items for Black Friday and Cyber Monday. When I needed to purchase a new cell phone, I decided to do it on Black Friday and I ended up finding the best deal at Best Buy. The phone that I purchased was triple the price after Black Friday and no other store sold the same
Finally, in 2001, the rules changed under the FAS 141 and 142 to help with the way goodwill will be accounted for. Bussines could now choose to either do an amortization or chose to contribute to impairment testing. Regardless of how companies would choose to do their goodwill, the Irs would still have to take its own precautions on to deal with goodwill. Goodwill can often be tricky in the sense to figure out how much it is really worth. In the case of the AOL Time Warner, it is mostly known as the worst business move in history. This is because these companies started out as being very profitable and were looking to grow in the stock market. Once the market collapse due to the recession the company Time Warner lost lots of money by acquiring AOL. If Time Warner would have known the true value of AOL at the time then this transaction wouldn 't have
Acquisition analysis includes determining consideration transferred, goodwill (or gain on bargain) and fair value of assets at the date of acquisition. When Woolly Ltd purchased Jumper Ltd; they paid more then the consideration transferred (fair value of assets less liabilities) of the entity, thus there was goodwill provided. Business combination valuation entries occur when assets or liabilities fair value differs from their carrying amount at the date of acquisition. As Jumper Ltd had assets with a higher fair value than carrying amount; there was reasoning for BCVR entries. Intragroup transactions come about through the transferal of assets or liabilities such as inventory or dividends from the subsidiary to the parent or visa versa (within the group). When Woolly Ltd and Jumper Ltd conduct intragroup transactions, as separate legal entities these transactions are recorded as normal however, from the point of the group these transactions are internal and therefore are not recognized by external users, thus the transactions must be eliminated. Finally, non-controlling interest occurs when the parent owns less than 100% of the subsidiary, however this is not relevant to Woolly Ltd as ownership of Jumper Ltd is 100%. These steps are
In addition, from their financial statements, it appears that they made substantial property purchases in 1995 ($126,000). These were financed them with their revolving loan. One can assume that this expense was a result of their significant increase in sales, but it is generally not a good cash management strategy to use short-term debt to buy long terms assets.
In the world today, many mergers and acquisitions are happening as a result of financial losses, gaining an advantage on a competitor, increasing capabilities, and strengthening services by diversifying the products. There are numerous other reasons, but this paper will focus on the reasons indicated above.
After the inspection of Barnes & Noble investing and financing activities for 2014 as identified in the cash flows statement one of the two largest investing activities would be the purchases of property and equipment. Regrettably this is a deteriorating value. (Statement of Cash Flow page 35) The second largest investment activity would be the net decrease in other noncurrent assets. This figure indicates an improvement from previous years evaluated. (Statement of Cash Flow page 35) Further investigation into the two largest financing activities; indicate that proceeds from credit facility would be the largest activity of the two financing activities. With net proceeds from Microsoft Commercial Agreement financing arrangement indicating a steady increase over the past few years. Indications are an increase in inventory, signals that company has spent more money to purchase raw materials. A change in equipment, assets or investments relate to cash from investing. Thus, a conflict with the investing strategy appears to be employed with this investment causing a deteriorating performance. As for the net proceeds from Microsoft Commercial Agreement the inflation from the previous year doubled. This is definitely a sound financial strategy for Barnes & Noble to be employing. According to the 2014 Annual Report, cash flows provided by operating activities
"Goodwill may be classified into purchased goodwill' and non-purchased goodwill'. Purchased Goodwill arises from the acquisition of an existing business, while non-purchased goodwill has been built-up over time and cannot be verified objectively".
Generally speaking, the change in stock prices on the day of the acquisition announcement means that the market approves or disapproves the acquisition. As the market value of Berkshire 's company went up, it demonstrates the market approval of it and created value of $2.55 billion for both buyers and sellers.
...nants and performance bonuses. Under positive accounting theory, when a company is in danger of violating a debt covenant, management is more likely to use accounting policies that shift reported earnings to the current period. This can lead to further manipulation of financial information through earnings management, and fair value provides an easy manner in which to do so.