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:
A) $72,000 of stock issue costs are treated as goodwill.
B) $19,000 of stock issue costs are treated as a reduction in the paid-in capital.
C) $19,000 of stock issue costs are expensed.
D) $72,000 of stock issue costs are expensed.

Answer 1

The $19,000 of stock issue costs consisting of audit, registration, and listing fees are treated as a reduction in paid-in capital, not expense or goodwill.

Step-by-step explanation:

Under the acquisition method, costs directly related to the stock issuance such as the audit fees related to the stock issuance ($10,000), stock registration fees ($5,000), and stock listing application fees ($4,000) are considered stock issue costs. These are not expensed but rather are accounted for as a reduction in the additional paid-in capital, leading to a correct answer of B) $19,000 of stock issue costs being treated as a reduction in the paid-in capital. Finder's fees and legal fees are considered acquisition-related costs and are typically expensed when incurred. Hence, choice C and D are incorrect as they incorrectly account for these costs, and choice A is incorrect because stock issue costs are not treated as goodwill.