Victory Corporation had the following selected account balan

Victory Corporation had the following selected account balances and fair values at December 31, 2016, when it was acquired by Danner Company.

Book Values

Danner Company acquired all of the common shares of Victory Corporation by issuing 6,000 shares of its own common stock valued at $80 per share. Danner incurred stock issuance costs of $3,500 and paid $19,500 in direct clerical and legal costs of the combination. Danner also agreed to pay an additional $20,000 if Victory achieved certain profit goals within the first three years. The contingent payment was determined to have a fair value of $8,000.

Required:

1. What is the acquisition cost of the combination?

2. How do the stock issuance costs affect Danner\'s balance sheet?

3. How do the direct costs of the combination affect Danner\'s balance sheet?

4. Without performing computations, how will Victory\'s revenues and expenses for 2016 affect the consolidated totals?

5. What will be the accounting treatment of the In-process R & D?

Solution

1.

2. Stock issuance costs are deducted from additional paid in capital from issue of common stock. Hence it reduces additional paid in capital under stock holders equity section of balance sheet

3. Direct costs are charge to income statement as investment expense. hence it reduces retained earnings in the balance sheet

4. since acquisition is at year end 2016, revenues and expenses of 2016 of subsidiary will have no effect on the consolidated totals.

5. In process R&D fair value is capitalised on acquisition and amortised over its useful life.