What are acquisition costs in purchase accounting?

2. Example of accounting for acquisition costs in purchase accounting

Letís look at a quick example of accounting for acquisition costs. Company Parent is buying Company Subsidiary. In connection with this acquisition, Company Parent incurs the following acquisition costs:

Nature

Amount

Way of Payment

Date Services
Provided

Finderís fee paid to a business broker

$100,000

Not paid yet

January 20X2

Company Subsidiaryís due diligence performed on request of Company Parent

$80,000

Paid via a wire transfer (cash)

December 20X1

Acquisition agreement(s) created and reviewed by a legal firm

$75,000

Not paid yet

January 20X2

Payroll, benefits and travel of Mergers and Acquisitions Manager of Company Parent involved into the purchase of Company Subsidiary

$10,000

Paid via payroll checks

December 20X1

Based on this information, Company Parent would post journal entries presented below:

December 20X1 includes due diligence expenses and expenses related to internal mergers and acquisitions personnel:

Account Titles

Debit

Credit

Acquisition Expenses

$90,000

 

      Cash

 

$90,000

January 20X2 includes finderís fee and legal fees:

Account Titles

Debit

Credit

Acquisition Expenses

$175,000

 

      Accrued Expenses

 

$175,000

When the accrued expenses from the journal entry above are settled, the following journal entry will be made:

Account Titles

Debit

Credit

Accrued Expenses

$175,000

 

      Cash

 

$175,000

As you can see, none of the acquisition costs is included in the purchase price of Company Subsidiary. All such costs are expensed when incurred and when services are provided.

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