Question

Phillips Company acquires all of the outstanding stock of Sylvania Company by issuing 20,000 shares of its own $5 par value stock. The market value of its stock at the date of issuance was $50 a share. Also in conjunction with the acquisition Phillips incurred the following costs: $8,000 in finders fees, $12,000 in legal fees and $10,000 in stock issuance fees. What amount of paid in capital will be recorded for the issuance of the new shares?

a. 0

b. 890000

c. 900000

d. 1,000,000

e. none of the above

Answer 1

Solution: The answer is D. 1,000,000

The Amount of paid in capital is $ 1,000,000.( 20,000 shares * ( $5 + $ 45))

Balance Sheet (Partial)
As of December 31
Stockholders' Equity:
Common stock	$0
Paid-in capital in excess common stock	$0
Paid-in capital in excess Treasury stock	$0
Retained earnings	$0
Total paid in capital		$0

In the above format, paid to capital includes not only par value of common stock but also value paid in excess of par value of common stock.

20,000 shares * par value + premium ( $5 + $ 45) = $1,000,000.

Expenses such as finders fee, legal fee and issuance fee will not considered in paid in capital calculation.

So, remaining options a,b,c,e are incorrect.