Final Answer:
Direct costs are expensed and indirect costs are decreased from the APIC (Additional Paid In Capital) account.
Step-by-step explanation:
When applying the acquisition method for a business combination, both direct and indirect costs must be accounted for. Direct costs are the costs associated with the transaction itself, such as legal and accounting fees. These costs are expensed, meaning that they are recorded as an expense in the income statement and reduce the net income of the company. Indirect costs, on the other hand, include costs such as salaries, rent, and other overhead costs associated with the transaction. These costs are not expensed, but instead are recorded as an adjustment to the additional paid-in capital (APIC) account. This means that the APIC account is reduced by the amount of the indirect costs, so that the net amount of the APIC account is reflective of the actual costs incurred in the transaction. This then means that the net amount of the APIC account is not impacted by the direct costs of the transaction.
In summary, when applying the acquisition method for a business combination, direct costs are expensed and indirect costs are decreased from the APIC account. This allows the company to accurately reflect the costs associated with the business combination, while also preserving the integrity of the APIC account.