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Basic Question 16 of 20
On December 31, 2008, Sam Company was merged into Paul Company. In carrying out the business combination, Paul Company issued 60,000 shares of its $10 par value common stock, with a fair market value of $15 per share, for all of Sam Company's outstanding common stock. The stockholders' equity section of the two companies immediately before the business combination was:
B. $300,000.
C. $500,000.
Assume that the transaction is accounted for as a purchase. On the December 31, 2009 consolidated balance sheet, the Additional Paid-In Capital account should be reported at
A. $400,000.
B. $300,000.
C. $500,000.
User Contributed Comments 7
| User | Comment |
|---|---|
| zwer | How does it match the logic in the article (b) where they come up with 1,390,000? |
| Rotigga | The logic in the example for 5-B-b is as follows: $400,000 (P's Other Contributed Capital pre-merger) + ($48-$15)*30,000 = $1,390,000 |
| ljamieson | Why not just $15*60000 - 400000 = 500000 |
| vi2009 | FV paid = 15 x 60,000 = 900,000 Par stock = 10 x 60,000 = 600,000 Therefore paid-in capital = 300,000 and add this additional paid in cap to existing 200,000 = 500,000 |
| quanttrader | paid in capital = (fmv of stock - par value) x shares |
| rodney176 | I'm with ljamiesons logic |
| davidt876 | Ijamieson and rodney - the short answer is because that's not how you calculate additional paid in capital (APC). APC is the amount a company earns above the par value of its stock at issuance (personally i haven't figured out the usefulness of separating this out from a gross common stock figure but i'm sure there is one) also the only place i can see you getting 400k from is from Sam Co's common stock.. i get that you think it makes sense to subtract the value of the common stock (400) from the value of the shares issued to purchase it ($15*600k). but what you're not buying common stock, you're buying all of Sam's equity, which includes APC and retained earnings. so you could say: (£15*600k) - ($400k+$100k+$200k) = $200k, but now you're just calculating goodwill (assuming the assets have already been adjusted to FV), not APC... |
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Learning Outcome Statements
describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities;
distinguish between IFRS and US GAAP in their classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;
analyze how different methods used to account for intercorporate investments affect financial statements and ratios.
CFA® 2025 Level II Curriculum, Volume 2, Module 10.