Question

1. Under GAAP, the consideration transferred in a business combination would include all of the following, except:
   1. Shares issued and given to the former owners of the acquired company
   2. Contingent consideration to be given to the former owners depending on the future earnings of that company
   3. Liabilities assumed by the purchaser
   4. Legal and accounting fees paid by the acquirer
2. When Large bought Tiny, Large issued some new shares of Large stock and gave them to the former owners of Tiny. In connection with issuing the stock, Large had to pay $25,000 of stock issuance fees. Large had to credit cash $25,000. What should it debit?
   1. Additional paid-in capital
   2. Stock issuance fees expense
   3. Investment in Tiny
   4. Goodwill
3. True/False: Under GAAP, consolidated financial statements should have the same balance sheet and income statement data as a company would have shown if it dissolved its subsidiaries into the parent company, instead of keeping them in separate legal existence.

Answer 1

1.

As per GAAP provisions, considerations is measured at fair value and shall consist of the acquisition date fair values of assets transferred by acquired, liabilities incurred by acquirers and equity interests issued by acquired. Considerations may include contingent consideration depending on future earnings. The costs related to acquisitions aid the acquisition but do not form part of the consideration. Hence, the correct option is d. legal and accounting fees paid by the acquirer

2.

Stock issuance is considered as part of financing activities. Hence, it should be treated as reduction of paid in capital. The journal entry to record stock issuance cost is to debit additional paid in capital and credit cash.

Hence, correct option is a.Additional paid-in capital

3.

The statement is false

The consolidation shall be done at pre-combination carrying amounts and not the amount the company can fetch assuming that it dissolves.