Answer: a pretax gain of $0.5 million in profit and loss.

## Explanation This question involves the accounting treatment for a business acquisition where the purchase price is less than the fair value of net identifiable assets. ### Key Accounting Principles: 1. **Business Combination Accounting**: Under IFRS 3 and US GAAP, when a company acquires another company, the assets and liabilities of the target are recorded at their fair values. 2. **Purchase Price Allocation**: The purchase price is allocated first to identifiable net assets at fair value, and any excess is recorded as goodwill. 3. **Bargain Purchase**: When the purchase price is **less than** the fair value of net identifiable assets, this is considered a "bargain purchase" or "negative goodwill." ### Calculation: - Purchase price: $4.5 million - Fair value of net identifiable assets: $5.0 million - Difference: $5.0M - $4.5M = $0.5 million ### Accounting Treatment: Since the purchase price ($4.5M) is **less than** the fair value of net identifiable assets ($5.0M), this represents a bargain purchase. According to accounting standards: - **IFRS 3**: Requires immediate recognition of the gain from a bargain purchase in profit or loss. - **US GAAP**: Also requires recognition of the gain in earnings immediately. ### Why not goodwill (Option A)? Goodwill arises when purchase price **exceeds** fair value of net identifiable assets. Here, the purchase price is lower, so no goodwill is created. ### Why not other comprehensive income (Option C)? Bargain purchase gains are recognized in profit and loss (income statement), not in other comprehensive income. ### Correct Answer: **Option B** is correct because the $0.5 million difference represents a bargain purchase gain that is recognized immediately in profit and loss as a pretax gain. ### Additional Note: Before recognizing the gain, the acquirer must reassess whether all assets and liabilities have been properly identified and measured at fair value. Once confirmed, the gain is recognized.

Author: LeetQuiz .