Definition:
A bargain purchase occurs when the fair market value of an asset is significantly less than its purchase price. This can happen in various situations, such as:
- Distressed Sale: When a company is in financial distress and is forced to sell assets at a significant discount.
- Bulk Purchase: Buying a large quantity of assets at a discounted price.
- Acquisition: Acquiring a company at a price that is significantly below its fair market value.
Key points about bargain purchases:
- Valuation: The fair market value of the asset is compared to its purchase price to determine if it’s a bargain purchase.
- Accounting Treatment: Bargain purchases are typically recorded at their fair market value, with any difference between the purchase price and fair market value recognized as a gain.
- Tax Implications: Bargain purchases can have tax implications, as the gain may be subject to taxation.
Why are bargain purchases important?
- Profit Opportunity: Bargain purchases can provide an opportunity for significant profits.
- Strategic Advantage: Acquiring assets at a bargain price can give a company a competitive advantage.
- Financial Performance: Bargain purchases can improve a company’s financial performance by increasing its assets and reducing its costs.
It’s important to note that identifying bargain purchases can be challenging, and it requires careful analysis and valuation.
In essence, a bargain purchase is when an asset is acquired at a price significantly below its fair market value, providing an opportunity for profit and strategic advantage.
