In a business combination, the acquirer incurs the following costs: - Finder's fee: $50,000 - Legal fees for the acquisition agreement: $30,000 - Stock issuance costs (SEC registration): $20,000 - Due diligence costs: $15,000 How should these costs be accounted for?

Answer options:

Capitalize all $115,000 as part of the investment/goodwill.

Expense $95,000; Capitalize $20,000.

Expense $95,000; Reduce Additional Paid-In Capital by $20,000.

Expense all $115,000.

How to approach this question

Rule: Acquisition costs (legal, consulting) -> Expense. Stock issuance costs -> Debit APIC (reduce equity proceeds).

Full Answer

C.Expense $95,000; Reduce Additional Paid-In Capital by $20,000.✓ Correct

ASC 805 requires acquisition-related costs (legal, accounting, valuation, professional fees) to be expensed in the period incurred. Costs to issue debt or equity securities are recognized in accordance with other applicable GAAP (equity issuance costs reduce APIC).

Common mistakes

Capitalizing acquisition costs into Goodwill.

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In a business combination, the acquirer incurs the following costs:<br/>- Finder's fee: $50,000<br/>- Legal fees for the acquisition agreement: $30,000<br/>- Stock issuance costs (SEC registration): $20,000<br/>- Due diligence costs: $15,000<br/><br/>How should these costs be accounted for?

How to approach this question

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Common mistakes

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