Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company.How should those costs be accounted for in a Purchase transaction?

Question

Quizplus · Accepted Answer

Direct combination costs and stock issuance costs should be included as part of the cost of acquiring the controlling investment and accounted for as part of the purchase price. Therefore, in a purchase transaction, these costs should be added to the acquisition cost of the investment and recorded as a part of goodwill. Entry B reflects this treatment by debiting goodwill and crediting cash for the total purchase price, including the direct combination costs and stock issuance costs. Entries A, C, D, and E do not reflect the correct accounting treatment of these costs.

Direct Combination Costs and Stock Issuance Costs Are Often Incurred