How tf do you answer this technical?
Came across this question on this forum:
Your client is seeking distressed assets. He has $1M on his B/S under cash and R/E on his B/S. You find him an estate on Park ave. which nobody wants. It has a fair value of $10M, but the buyer is willing to give your client an exclusive offer for ONLY $1M! Your client jumps on the opportunity and buys. How does he reflect this on his proforma B/S?
This was the answer someone posted:
Write up to FMV, deduct the goodwill from all non-current assets, if fixed assets are down to $0 and you still have goodwill, reconigze a non-cash extrafoary gain (GAAP) on IS so on BS negative goodwill disappesrs
That answer makes no sense. Anyone else have an answer?
In a world with no taxes, assets go up by $9mm and retained earnings goes up by $9mm.
Debit Investment $1M
Credit Cash $1M
I don't think this affects your retained earnings since there's no change to the income statement.
not sure if it works the same when acquiring non-operating assets but the entry for acquiring a business for cash at less than fair value is:
debit: asset at FV (10m) credit: cash (1m) credit: gain on bargain purchase (9m)
there are no longer extraordinary gains since the new standard in 2015/16
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