Question

On December 31, 2020, Lemmon Company issued 20,000 shares of its common stock with a fair value of $50 per share for all of the outstanding common shares of May Company. Stock issuance costs of $4,000 and direct costs of $1,000 were paid. In addition, Lemmon promised to pay an additional $2,200 to the former owners if May's earnings exceeded a certain amount during the next year. The fair value of the potential obligation is estimated at $2,000. Compute the investment to be recorded at date of acquisition.

Answer 1

$1,002,000

Step-by-step explanation:

The costs incurred on the share for share exchange include the fair value per share ,issue costs,direct cost as well as contingent consideration(consideration based on the acquired business performance.

However,the costs eligible to be recorded as investment upon acquisition are the fair value per share and the contingent obligation as shown below:

Fair value (entire shares) $50*20,000=$1,000,000

fair value of potential obligation =$2000

total value of investment $1,002,000

The issue costs and direct should be expensed immediately.