LBO: Evaluating a Change in Ownership A new investor and the management of Oldco Inc. form Newco Inc. as a vehicle for acquiring all of the outstanding common stock of Oldco Inc., which is owned solely by the Moola family. The new investor and Oldco’s management each invested $50,000 cash in exchange for 450 shares of Newco common stock. Newco borrowed $1,500,000 from a financial institution. The Moola family was given $1,600,000 cash and 100 shares of Newco common stock in exchange for all of its Oldco common stock holdings.

Required 1. How does this transaction differ from the acquisition of 90% of Oldco’s common stock by an established operating company that pays $1,600,000 cash?

2. How is the preceding transaction accounted for differently from the transaction described in re¬

quirement 1?

3. What rationale exists for the different accounting treatment?