What happens if purchase price < shareholder's equity in an acquisition?Subscribe
Usually if purchase price > shareholder's equity, goodwill is created to make up for the difference between purchase price and market value of SE.
What if purchase price < shareholder's equity. Eg. if we paid $1000 in cash for a company, but its assets were worth $2000 and liabilities worth $800.
Is it right to say that if the asset and liabilities values were book values, then we could possibly write up/down the assets/liabilities to fair market value, before assessing further. But if assets and liability values were market values, then we should recognize negative goodwill, i.e. a gain to the income statement?
I don't quite understand the concept of negative goodwill and why it should be recognized as a gain (intuitively it makes sense - you're basically buying a bargain, but from an accounting perspective, it seems a little odd)...