How Are Stock Issuance Costs and Direct Combination Costs Treated

question 4

Multiple Choice

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?

• A) Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed.
• B) Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital.
• C) Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital.
• D) Both are treated as part of the acquisition consideration transferred.
• E) Both are treated as a reduction to additional paid-in capital.

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Definitions:

Convertible Bond

A type of bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.

Common Stock

A type of equity security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits.

Bondholder

An individual or entity that owns bonds issued by corporations or governments and is entitled to receive interest payments and the repayment of the principal.

Individual Bonds

Debt securities issued by entities such as corporations or governments to finance projects or operations, owned by the investors purchasing them.