Question

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, how should those costs be accounted for in a purchase transaction?

Answer 1

Direct combination costs should be recorded as an expense, while stock issuance costs should be deducted from stock issuance proceeds.

Step-by-step explanation:

When making a controlling investment in another company using the purchase method, direct combination costs and stock issuance costs should be accounted for in the purchase transaction in the following way:

1. Direct combination costs, such as legal fees or consulting fees, should be recorded as an expense in the period in which they are incurred.
2. Stock issuance costs, such as underwriting fees or legal fees, should be deducted from the proceeds of the stock issuance and recorded as a reduction of equity.

By recording these costs in this way, the company is accurately reflecting the expenses related to the purchase transaction and properly allocating the costs to the appropriate period and account.