Question

Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000.

Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?
A) $72,000
B) $19,000
C) $53,000
D) $63,000

Answer 1

Under the acquisition method, the total amount to be expensed is $19,000, which includes the audit fees related to stock issuance, stock registration fees, and stock listing application fees.

Step-by-step explanation:

Under the acquisition method, the expenses associated with a business combination such as a merger or acquisition are characterized as either part of the cost of the acquisition or as expenses that should be recognized separately. Finder's fees, legal fees, audit fees related to stock issuance, stock registration fees, and stock listing application fees are all costs that are incurred to complete the merger and acquisition process. According to generally accepted accounting principles (GAAP), direct costs of the transaction such as finder's fees and legal fees are added to the cost basis of the investment, while indirect costs, such as audit fees related to stock issuance, stock registration, and listing application fees, should be expensed as incurred.

The expenses that are immediately expensed under the acquisition method are:

• Audit fees related to stock issuance: $10,000
• Stock registration fees: $5,000
• Stock listing application fees: $4,000

Therefore, the total amount to be expensed is $19,000 (B).