Direct costs incurred to sell stock, such as underwriting costs, should be accou

ID: 2420837 • Letter: D

Question

Direct costs incurred to sell stock, such as underwriting costs, should be accounted for as

1. reduction of additional paid-in capital.

2. an expense of the period in which the stock is issued.

3. an intangible asset.

      1
       2
       3
       1 or 3

Norton Company issues 4,000 shares of its $5 par value common stock having a market value of $25 per share, and 6,000 shares of its $15 par value preferred stock having a market value of $20 per share, all for a lump sum of $192,000. What amount of the proceeds should be allocated to the preferred stock?
      $172,000

       $120,000

       $104,727

       $90,000

Explanation / Answer

Direct cost should be accounted for as (1)reduction of additional paid in capital

Fair Market Value of Common Stock (4,000 shares at $25.00 per share)

$100,000

Fair Market Value of Preferred Stock (6,000 shares at $20.00 per share)

$120,000

Fair Market Value of Lump-Sum Purchase

$220,000

Allocation to Common Stock ($100,000 / $220,000) x $192,000

$87,273

Allocation to Preferred Stock ($120,000 / $220,000) x $192,000

$104,727

Total Allocation of Lump-Sum Purchase

$192,000

Ans is $104,727