I understand how the Equity portion of the new owner of a Company that has been acquired and consolidated is zero. Example: Say your company has $100,000 in assets, $60,000 in liabilities and $40,000 worth of owners' equity. (Assets minus liabilities always equals equity.) Now you sell out to another firm for, say, $75,000. First of all, the buyer's assets decrease by $75,000 (what it paid for your company). The buyer then adds your $100,000 in assets and $60,000 in liabilities to its own. Because it paid $35,000 more than the $40,000 equity value, the company reports the extra amount as an intangible asset called goodwill. The buyer's balance sheet shows a net increase of $60,000 in assets ($135,000 minus $75,000) and an increase of $60,000 in liabilities. The new assets minus the new liabilities equals zero. Owners' equity does not transfer to the consolidated balance sheet.
However, when a business is acquired as a going concern, the equity portion does not become zero instead it is transferred to the new owner. I have difficulty understanding why this is the case. Are there any accounting rules at play here?
Help will be appreciated :)
Architecto ab ut in modi voluptate placeat quia. Ipsa beatae voluptatem fugiat laboriosam praesentium et placeat. Rerum tempore quia ullam quam velit. Magnam voluptatum ullam atque. Qui velit similique alias qui dolores qui nostrum. Similique alias omnis repellat sint. Dolorem laborum ducimus impedit aut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...