CFA Practice Question

There are 334 practice questions for this study session.

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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