Question

On January 1, 2019, Company A acquired 100% of the voting common stock of Company B from Company B’s shareholders. Prior to the transaction, Company A had 11,440 shares of voting common stock outstanding and Company B had 5,000 shares of voting common stock outstanding. Which of the following terms or conditions of the transaction is an indicator that Company B is the acquiring entity for accounting purposes? a. The full slate of the Board of Directors is elected every two years. Company A Directors (from before the transaction) occupy 8 of the 12 seats on Company A’s Board after the acquisition. Company B Directors (from before the transaction) occupy 4 of the 12 seats on Company A’s Board after the acquisition.b. Company A issued 14,560 new shares of Company A common stock to execute the transaction.c. Company A changed its name to "Company B."d. Immediately after the transaction, Company B’s Chief Operating Officer became Company A’s Chief Operating Officer. All other executive positions were held by Company A executives

Answer 1

Answer: b. Company A issued 14,560 new shares of Company A common stock to execute the transaction.

Explanation:

The terms or conditions of the transaction which is an indicator that Company B is the acquiring entity for accounting purposes is that Company A issued 14,560 new shares of Company A common stock to execute the transaction.

The above scenario was chosen because when 14,560 shares are being held, the former shareholders that were in company B will own:

= 14,560/(11,440 + 14,560)

= 14560/26000

= 56% of common stock.

Because 56% of common stock is being own by them means that the company is being controlled by them as they own majority and therefore the board will be elected by them for the next two years.