Rugby, Inc.issues 20,000 shares of $10 par value common stock with a market value of $15 each for Soccer Company.Rugby, Inc.pays related acquisition costs of $50,000.The total fair value of net assets acquired from Soccer Company is $450,000.Which of the following is true related to recording the purchase and related costs:
A)Debit a loss for $150,000 on the acquisition of the business
B)Debit goodwill for $250,000 above par value on the acquisition of the business
C)Credit a gain for $150,000 on the acquisition of the business and capitalize the $55,000 of acquisition costs
D)Credit a gain for $150,000 on the acquisition of the business and expense the acquisition costs.

Question

Rugby, Inc.issues 20,000 shares of $10 par value common stock with a market value of $15 each for Soccer Company.Rugby, Inc.pays related acquisition costs of $50,000.The total fair value of net assets acquired from Soccer Company is $450,000.Which of the following is true related to recording the purchase and related costs:​
A)​Debit a loss for $150,000 on the acquisition of the business
B)​Debit goodwill for $250,000 above par value on the acquisition of the business
C)​Credit a gain for $150,000 on the acquisition of the business and capitalize the $55,000 of acquisition costs
D)​Credit a gain for $150,000 on the acquisition of the business and expense the acquisition costs.

Quizplus · Accepted Answer

The correct accounting treatment for the acquisition involves recognizing the fair value of the shares issued ($300,000, calculated as 20,000 shares at $15 each) and the acquisition costs as an expense. The total fair value of net assets acquired is $450,000, which means the purchase price (shares issued) is less than the fair value of net assets acquired, leading to a gain. Acquisition costs are expensed, not capitalized.