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Current U.S. GAAP requires use of the acquisition method of accounting for business combinations. Applying the acquisition method involves recognizing and measuring:

a. The consideration transferred for the acquired business and noncontrolling interest, measured at fair value, including any contingent consideration

b. The separately identified assets acquired and liabilities assumed.

c. Goodwill, or a gain from a bargain purchase.

Acquisition method when dissolution takes place

On January 1, 2021, a Parent Company (P) buys 100% of a subsidiary (S). Financial information for P and S as of 1/1/21 is as follows:

		P	S
			(book value)	(fair value)
Current assets		2,000,000	300,000	300,000
PP&E, net		4,000,000	500,000	900,000
Intangibles		1,000,000	100,000	1,200,000
Current liabilities		(500,000)	(50,000)	(50,000)
Long-term debt		(2,000,000)	(250,000)	(300,000)
Net assets		4,500,000*	600,000**	2,050,000

*Ps stockholders equity section consists of Common Stock of $500,000, Additional PIC of $2,000,000 and Retained Earnings of $2,000,000.

**Ss stockholders equity section consists of Common Stock of $50,000, Additional PIC of $200,000, and Retained Earnings of $350,000.

A) Purchase Price Equals Fair Value of Net Assets

The fair value of Ss net assets equals $2,050,000. P pays to Ss owners (NOT to S) $550,000 cash and $1,500,000 of common stock that will be newly issued (15,000 shares at a current market value of $100 per share, par value is $10 per share). S will then dissolve itself as a legal entity.

Because S will be dissolved, P directly records a consolidation entry in its financial records, as follows:

B)Purchase Price Exceeds Fair Value of Net Assets

Assume in the above example that instead of exchanging $550,000 of cash and $1,500,000 of common stock for the net assets of S that P pays $1,000,000 of cash and $1,500,000 of common stock. Any excess price paid over the fair value of the net assets acquired is allocated to goodwill:

C) Purchase Price Less Than Fair Value of Net Assets (bargain purchase)

Now assume that P pays $450,000 of cash and $1,500,000 of common stock for S. Under US GAAP, a gain is recorded in the case where the purchase price is less than the fair value of the net assets acquired. The consolidating entry is as follows: