Final answer:
The primary difference in accounting for a dissolved subsidiary versus one that retains its incorporation is the consolidation of assets, liabilities, and the potential recognition of goodwill.
Step-by-step explanation:
The primary accounting difference between when a subsidiary is dissolved and when it retains its incorporation lies in the treatment of assets, liabilities, and goodwill in the financial statements of the acquiring company. When a subsidiary is dissolved, its assets and liabilities are transferred to the parent company and are consolidated at their book values. This means that the subsidiary no longer exists as a separate legal entity and its financial operations are fully integrated with the parent company's financial statements. On the other hand, when a subsidiary retains its incorporation, it continues to operate as a separate legal entity, although it is controlled by the parent company. In this case, the consolidation of the subsidiary's assets and liabilities is done at fair value, and this often gives rise to goodwill, which is the premium paid over the fair value of the net identifiable assets.
Goodwill is recognized in cases where the purchase consideration paid by the acquirer exceeds the fair value of net identifiable assets acquired. Therefore, the correct answer to the student's question is: If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition (C) is incorrect. The correct option is D, which states that if the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. However, in reality, they are consolidated at fair value, not book value, and goodwill may be recognized if applicable. Option E, regarding formal recording, is incorrect as well, because even though the subsidiary operates independently, the consolidation must be reflected in the financial records of the acquiring company.