Question

On December 31 of the current year, 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 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:

Answer 1

Complete Question:

On December 31 of the current year, 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 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:

Paul Sam

Common Stock $500,000 $400,000

Additional Paid-in Capital 200,000 100,000

Retained Earnings 300,000 200,000

Assume that the transaction is accounted for using the acquisition method. In the consolidated balance sheet at the end of the next year, the Additional Paid-In Capital account should be reported at

A) $400,000.

B) $300,000.

C) $500,000.

D) $200,000.

Answer:

Option C. $500,000

Explanation:

The reason is that the new additional Paid In Capital will be calculated by taking the stock issuing company's Addition Paid-In Capital and the additional paid in capital arising from stock issue, which means that:

Addition Paid-In Capital after merger = Addition Paid-In Capital of Paul Company + Addition Paid-In Capital arising from shares issues

Here

Addition Paid-In Capital of Paul Company = $200,000

Addition Paid-In Capital arising from shares issues = 60,000 shares * ($15 per share - $10 per share) = $300,000

By putting above values in the equation, we have:

Addition Paid-In Capital after merger = $200,000 + $300,000

Addition Paid-In Capital after merger = $500,000