CFA Practice Question

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CFA Practice Question

On December 31, 2008, 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 market 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:

Assume that the transaction is accounted for as a purchase. On the December 31, 2009 consolidated balance sheet, the Additional Paid-In Capital account should be reported at

A. $400,000.
B. $300,000.
C. $500,000.
Correct Answer: C

[($15 - $10) x 60,000] + $200,000 = $500,000.

User Contributed Comments 7

User Comment
zwer How does it match the logic in the article (b) where they come up with 1,390,000?
Rotigga The logic in the example for 5-B-b is as follows: $400,000 (P's Other Contributed Capital pre-merger) + ($48-$15)*30,000 = $1,390,000
ljamieson Why not just $15*60000 - 400000 = 500000
vi2009 FV paid = 15 x 60,000 = 900,000
Par stock = 10 x 60,000 = 600,000
Therefore paid-in capital = 300,000
and add this additional paid in cap to existing 200,000 = 500,000
quanttrader paid in capital = (fmv of stock - par value) x shares
rodney176 I'm with ljamiesons logic
davidt876 Ijamieson and rodney - the short answer is because that's not how you calculate additional paid in capital (APC). APC is the amount a company earns above the par value of its stock at issuance (personally i haven't figured out the usefulness of separating this out from a gross common stock figure but i'm sure there is one)

also the only place i can see you getting 400k from is from Sam Co's common stock.. i get that you think it makes sense to subtract the value of the common stock (400) from the value of the shares issued to purchase it ($15*600k). but what you're not buying common stock, you're buying all of Sam's equity, which includes APC and retained earnings. so you could say:

(£15*600k) - ($400k+$100k+$200k) = $200k, but now you're just calculating goodwill (assuming the assets have already been adjusted to FV), not APC...
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