What are acquisition costs in purchase accounting?
2. Example of accounting for acquisition costs in purchase accounting
Let’s 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 |
Finder’s fee paid to a business broker |
$100,000 |
Not paid yet |
January 20X2 |
Company Subsidiary’s 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 finder’s 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.