pls solve for a,b,c. thank you! 1. XYZ Ltd. acquired 100% of the outstanding com
ID: 2338949 • Letter: P
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pls solve for a,b,c. thank you!
1. XYZ Ltd. acquired 100% of the outstanding common stock of ABC Ltd for $500,000 cash and 2,000 shares of its own common stock (S10 par value), which was trading at $50 per share at the acquisition date. XYZ Ltd incurred the following direct costs Legal fees (acquisition) S 52,000 27,000 11,000 Legal fees (stock issue)31,000 Accounting fees (review) 14,000 Accounting fees Travel expenses SEC filing fees 9,000 $144,000 Total Prior to the consummation date, $117,000 had been paid and charged to a deferred charges account pending consummation of the acquisition. The remaining $27,000 has not been paid or accrued. Required: Pass journal entries in books of XYZ Ltd on acquisition and direct costs. What amount of direct cost is considered as acquisition expenses and Addition paid up a. b. capital? c. Why do companies consider direct cost as acquisition expenses and Addition paid up capital?Explanation / Answer
Solution A Date Particulars Debit Credit Investment in ABC Ltd. Dr. $ 600,000 To Bank Account / Cash Account $ 500,000 To Paid up Share Capital Account $ 20,000 To Securities Premium $ 80,000 (Being investments made in ABC Ltd for $600,000 paid partially in cash amounting to $500,000 and partially in 2000 equity shares having face value of $10 each issues at a premium of $40 per share. And incurring Stock Issue expense of $31,000) Legal Fees Dr $ 83,000 Accounting Fees Dr $ 27,000 Travel Expense Dr $ 11,000 Accounting Fees Dr $ 14,000 SEC Filing Fees Dr $ 9,000 To Bank Account / Cash Account $ 144,000 (Being expenses related to acquisition of ABC Ltd Incurred) Investment in ABC Ltd. Dr. $ 31,000 To Legal Fees $ 31,000 (Being stock issue expense adjusted to Investment in ABC Ltd) Solution B According to ASC 805 "Business Combination" "Acquisition-related costs are considered separate transactions and should not be included as part of the consideration transferred but, rather, expensed as incurred or when the service is received". However, expenses relating to issuance of equity shares should be adjusted from the net proceeds of the issue. In the given question all the direct expenses incurred by XYZ ltd. except for legal fees of $31,000 incurred for issuance of equity shares should be expensed of as and when incurred. Also, since in the given question there is no cash consideration received on issuance of equity shares the amount of legal fees incurred for issuance of equity shares shall be added to the cost of investments. Solution C Companies consider direct cost as acquisition expense and addition paid up capital because companies believe that since such expenses are incurred solely for the purpose of the acquisition transaction these costs should be treated as acquisition costs and be capitalized to the investment value.
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