You have been engaged to audit the financial statements of Solamente Corporation for the fiscal year ended May 31, 2005. You discover that on June 1, 2004, Mika Company had been merged into Solamente in a business combination. You also find that both Solamente and Mika (prior to its liquidation) incurred legal fees, accounting fees, and printing costs for the business combination; both companies debited those costs to an intangible asset ledger account entitled “Cost of Business Combination.” In its journal entry to record the business combination with Mika, Solamente increased its Cost of Business Combination account by an amount equal to the balance of Mika’s comparable ledger account.
Instructions
Ø Evaluate Solamente’s accounting for the out-of-pocket costs of the business combination with Mika in light of IFRS and GAAP guidelines.
