Question

Which one of the following payments by an acquirer in a business combination is most likely to be a part of the cost in recording a business combination transaction?

A. Payment by the acquirer to settle a trade payable due to the acquired entity.
B. Payment by the acquirer to the acquiree's management personnel to remain with the firm for one year following the business combination.
C. Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree.
D. Payment by the acquirer to reimburse the acquiree for cost it incurred in carrying out the business combination.

Answer 1

The cost most likely included in the business combination transaction is the payment for a valid patent from the acquiree not previously recognized.

Step-by-step explanation:

The payment most likely to be a part of the cost in recording a business combination transaction is C. Payment by the acquirer to the acquiree for a valid patent not previously recognized by the acquiree. This is because the acquisition of a patent is an identifiable asset that can be recognized on the balance sheet.

It would be part of the purchase price allocation for the acquisition, where the acquirer recognizes the assets acquired and liabilities assumed at their fair market values. Payments to settle trade payables or to employees for staying with the firm, and reimbursements of the acquiree's costs related to the business combination, do not typically form part of the recorded cost of the business combination but are instead recorded as post-combination expenses or adjustments.

In a business combination transaction, the payment by the acquirer to reimburse the acquiree for costs it incurred in carrying out the business combination is most likely to be a part of the cost in recording the transaction.