Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a pre-2009 purchase transaction?
A) Option A
B) Option B
C) Option C
D) Option D
E) Option E

Question

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a pre-2009 purchase transaction? 
A) Option A 
B) Option B 
C) Option C 
D) Option D 
E) Option E

Quizplus · Accepted Answer

Option B suggests that direct combination costs and stock issuance costs should be accounted for as a reduction in the value of the investment. This is in accordance with the pre-2009 accounting rules, which required such costs to be capitalized as part of the investment cost. However, since these costs do not add value to the investment, they should be offset against the carrying amount of the investment. This reduces the carrying amount of the investment and, correspondingly, increases the gain or loss recognized on the disposal of the investment. Hence, option B is the correct choice.

Direct Combination Costs and Stock Issuance Costs Are Often Incurred