In a business combination, the acquirer incurred the following costs: - Finder's fee: $50,000 - Legal fees for the acquisition: $100,000 - Stock registration fees: $20,000 - Audit fees for SEC registration: $10,000 How should these costs be treated?

Answer options:

Capitalize $180,000 to Goodwill.

Expense $180,000.

Expense $150,000; Reduce APIC by $30,000.

Capitalize $150,000; Expense $30,000.

How to approach this question

Rule: Direct costs (legal, finder) -> Expense. Stock Issue Costs (registration, underwriter) -> Debit APIC (reduce equity).

Full Answer

C.Expense $150,000; Reduce APIC by $30,000.✓ Correct

Acquisition-related costs (finder's fees, legal fees) are expensed as incurred. Costs to issue stock (registration, audit for registration) are treated as a reduction of the issue price of the securities (Debit APIC).

Common mistakes

Capitalizing acquisition costs to Goodwill (old rule).

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In a business combination, the acquirer incurred the following costs:<br/>- Finder's fee: $50,000<br/>- Legal fees for the acquisition: $100,000<br/>- Stock registration fees: $20,000<br/>- Audit fees for SEC registration: $10,000<br/><br/>How should these costs be treated?

How to approach this question

Full Answer

Common mistakes

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