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 :)
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