In a business combination, how should the acquirer account for the following costs?<br/>1. Finder's fees paid to an investment bank.<br/>2. Costs to register and issue stock used as consideration.

Answer options:

Expense as incurred; 2. Reduction of Additional Paid-in Capital (APIC).

Capitalize to Goodwill; 2. Expense as incurred.

Expense as incurred; 2. Expense as incurred.

Capitalize to Goodwill; 2. Reduction of APIC.

How to approach this question

Distinguish between direct acquisition costs (Expense) and stock issuance costs (Equity reduction).

Full Answer

A.1. Expense as incurred; 2. Reduction of Additional Paid-in Capital (APIC).✓ Correct

ASC 805 requires acquisition-related costs (finder's fees, advisory, legal, valuation) to be expensed in the period incurred. Costs to issue debt or equity securities are treated as a reduction of the proceeds (Debit APIC for stock).

Common mistakes

Capitalizing transaction costs to Goodwill (old rule).

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