The accountant for Birrarung Ltd, Ms Wei, has sought your advice on an accounting issue that has been puzzling her. When preparing the acquisition analysis relating to Birrarung Ltd’s acquisition of Kakadu Ltd, she calculated that there was a gain on bargain purchase of $25 000. Being unsure of how to account for this, she was informed by professional acquaintances that this should be recognised as income. However, she reasoned that this would increase the consolidated profit in the first year after acquisition date. As she is aware that the pre-acquisition equity of the subsidiary needs to be eliminated on consolidation, she is unsure of whether this profit is all post- or preacquisition profit or a mixture of the two.

Required 

Compile a detailed report for Ms Wei on the nature of the gain on bargain purchase, its recognition on acquisition and the effects of its recognition on subsequent consolidated financial statements.