What does a bargain purchase indicate when acquiring a subsidiary?

A bargain purchase indicates that the parent entity paid less than the fair value of net assets of the subsidiary at the time of acquisition. This situation can arise when the selling company is in financial distress, prompting a sale at a price below the typical market value of its assets.

In such cases, the parent company benefits by obtaining valuable assets and potentially inheriting operations that could enhance their own financial performance without having to pay the full market value. This can be identified through the fair value assessments of the identifiable assets and liabilities at the acquisition date. The recognized gain from a bargain purchase would be recorded in the financial statements, reflecting this advantageous transaction for the parent entity.

The context of this option lies in recognizing and accounting for acquisitions properly according to accounting standards, which require that all identifiable assets acquired and liabilities assumed are measured at their fair values. When the total purchase price is less than the aggregate fair value of these net assets, it results in a bargain purchase gain.