Question

On August 31, 20X1, Wood Corp. issued 200,000 shares of its $20 par value common stock for the net assets of Pine, Inc. in a business combination accounted for by the acquisition method. The market value of Wood's common stock on August 31 was $45 per share. Wood paid a fee of $200,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $150,000. No goodwill was involved in the purchase. What amount should Wood capitalize as the cost of acquiring Pine's net assets?

$4,000,000

$9,000.000

$9,200,000

$9,350.000

Answer 1

Ans- The correct option is b that is 9,000,000.

The cost of acquiring a company includes all cash and other assets distributed, liabilities incurred, and equity shares issued, all at fair value. Direct costs of carrying out a combination (such as accounting, legal, consulting, and finders' fees) are expensed in the period incurred; they are not included as part of the acquired entity. The cost of registering and issuing securities used to effect a business combination are charged against the fair value of the securities issued and, for equity securities, serve to reduce the amount of additional paid-in capital recognized. Thus, this correct answer ($9,000,000) was computed as 200,000 shares issued × $45 per share (fair market value) = $9,000,000. The $200,000 fees paid to a consultant would have been expensed, and the $150,000 cost of registering and issuing the common stock would have reduced the amount recognized from the sale of the stock.

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