Question

Pond Corporation exchanges 100,000 shares of newly issued P1 par value common stock with a fair market value of P20 per share for all of the outstanding p5 par value common stock of Silk Inc. and Silk is then dissolved. Pond paid the following costs and expenses related to the business combination:

Costs of special shareholders' meeting to vote on the merger, P12,000
Registering and issuing securities, P10,000
Accounting and legal fees, P18,000
Salaries of Pond's employees assignedto the implementation of the merger, P27,000
Cost of closing duplicate facilities, P13,000
In the business combination of Pond and Silk:


a. Only the accounting and legal fees are included in the purchase price of Silk.
b. All of the costs except those of registering and issuing the securities are included in the purchase price of Silk.
c. The costs of registering and issuing the securities are included as part of the purchase price for Silk
d. The salaries of Pond's employees assigned to the merger are treated as expenses.

Answer 1

In the business combination between Pond Corporation and Silk Inc., only the accounting and legal fees are included in the purchase price of Silk. The registering and issuing securities costs are treated as equity, salaries as expenses, and facility closure costs are expensed post-combination.

Step-by-step explanation:

The student's question surrounds the topic of the purchase price allocation and the cost treatment of different expenses associated with a business combination. In a business merger or acquisition, specific costs are capitalized as part of the purchase price while others are expensed. When Pond Corporation acquires Silk Inc., specific expenses related to the business combination will be treated differently on the financial statements:

• The costs of the special shareholders' meeting (P12,000) and accounting and legal fees (P18,000) are capitalized as part of the purchase price.
• The costs of registering and issuing securities (P10,000) are treated as a reduction from equity and are not part of the purchase price for Silk.
• Salaries of Pond's employees assigned to the merger (P27,000) are generally expensed as incurred.
• Cost of closing duplicate facilities (P13,000) is typically treated as part of post-combination restructuring costs and expensed.

Thus, in this case, the correct treatment is that only the accounting and legal fees are included in the purchase price of Silk.