Question

Miguel Corporation and Forest Company merged as of January 1, 20X3. Miguel paid finder's fees of $36,000 and legal fees of $8,000. Miguel also paid audit fees related to the stock issuance of $12,000, stock registration fees of $7,000, and stock listing application fees of $3,000.

Based on the preceding information, under the acquisition method
A) $22,000 of stock issue costs are treated as a reduction in the issue price.
B) $22,000 of stock issue costs are expensed.
C) $66,000 of stock issue costs are classified as goodwill.
D) $66,000 of stock issue costs are expensed.

Answer 1

The finder's and legal fees incurred by Miguel Corporation during its merger with Forest Company would be expensed, while the audit, stock registration, and stock listing application fees are treated as a reduction in the issue price of the stock.

Step-by-step explanation:

Under the acquisition method, the various fees incurred by Miguel Corporation during the merger with Forest Company are treated differently:

• Finder's fees and legal fees are considered direct costs of the business combination and are thus expensed in the period they are incurred.
• Audit fees, stock registration fees, and stock listing application fees are associated with the issuance of stock, and therefore, they are treated as a reduction in the proceeds from the stock issuance, effectively reducing the additional paid-in capital.

Based on this information, the correct answer is A) $22,000 of stock issue costs are treated as a reduction in the issue price, which includes the audit fees, stock registration fees, and stock listing application fees.