Question

Direct incremental costs incurred to sell shares such as underwriting costs should be accounted for as___________

1. reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset

Answer 1

Incremental costs incurred when selling shares are accounted for as a reduction of additional paid-in capital, not as an expense or intangible asset.

Step-by-step explanation:

Direct incremental costs incurred to sell shares, such as underwriting costs, should be accounted for as a reduction of additional paid-in capital. When a firm issues stock, it can generate returns for investors through dividends or capital gains. The costs of issuing stock are significant, involving investment bankers, attorneys, and compliance with regulatory bodies like the SEC. These costs are not recorded as an expense of the period nor are they considered an intangible asset, but rather reduce the additional capital contributed over the par value of the shares.