How are stock issuance costs and direct combination costs treated in a business

Question

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?

a. Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed.

b. Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital.

c. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital.

d. Both are treated as part of the acquisition consideration transferred.

e. Both are treated as a reduction to additional paid-in capital.

Explanation / Answer

Answer is C ) Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital.

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. Using the purchase method, those costs be accounted for in a purchase transaction.

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