Question

In acquisition accounting, one company is identified as the acquiring company. Which statement below is most likely to be true concerning the acquiring company.

Select one:

A. Its shareholders sell their stock before the acquisition takes place.

B. It pays cash for the acquisition rather than issuing stock.

C. It issues stock to acquire the other company.

D. Its shareholders receive a premium over market value in the exchange of shares.

Poppy Corporation acquires Stevens Company, paying the owners of Stevens 1,000,000 new shares with a par value of $0.50 per share and a fair value of $50 per share at the date of acquisition. Poppy also incurs cash registration fees of $100,000 and consulting fees of $700,000. Several of Stevens' former owners will stay on as employees, and Poppy agrees to pay them an additional amount if they remain with the company. The present value of this agreement at the date of acquisition is $400,000.  

What is Poppy's reported acquisition cost?

Select one:

A. $50,400,000

B. $50,700,000

C. $50,000,000

D. $51,200,000

Answer 1

To acquire any company, the acquiring company should become the stockholder of the
target company. To acquire the existing common stock shares, the acquiring company
purchases the shares from the existing stockholders by payment of consideration.
Hence, the correct statement would be
B. It pays cash to acquire the other company.
The other statements are not correct due the following reasons.
A.The acquiring company has other available options to pay the purchase consideration, for
example, from own funds or through external financing. Every acquisition is not preceeded
by sale of stock by the existing stockholders.
C.The acquiring company has to purchase the common stock from the existing stockholders
of the target company.By issuing stock, it would not become the owner of the common
stock of the target company
D.The purchase consideration is paid on the basis of the market price of the stock or the
value of the net assets of the target company. There is no exchange of shares on which the
shareholders would receive a premium.
Details of amounts paid by Poppy Corporation for acquisition
1,000,000 equity shares having a market value of $ 50 per share	$50,000,000
Cash registration fees	$100,000
Consulting fees	$700,000
Additional consideration on contingent future event	$400,000
Purchase consideration includes the acquisition price paid to acquired company and will
not include any additional expenses on acquisition except for registration fees paid for
equity or debt securities
Hence, the acquisition cost would included the following
1,000,000 equity shares having a market value of $ 50 per share	$50,000,000
Cash registration fees would not be included as it is not clear that this is paid against registration of equity securities	-
Consulting fees would not be included as it is not considered a part of acquisition cost but is treated as an expense in the period in which it is incurred	-
Additional consideration is subject to the condition that the existing owners would remain in the company as employees.Hence, it is part of the compensation agreement and not a part of acquisition cost	-
Total acquisition cost for Poppy Corporation	$50,000,000
Answer - C. $ 50,000,000