Able Corp. acquires Bailey Company in a transaction that is properly accounted for as a business acquisition. The acquisition contract and Bailey's share-based compensation agreement require Able stock to be exchanged for Bailey common stock issued to Bailey's employees as share-based payments. No further service is required by the employees of Bailey to qualify for the replacement awards. How should Able account for the shares of stock issued as replacement awards to employees of Bailey?

As a cost of acquisition (Answer)

As an expense in the current period

As a loss in the current period

As an extraordinary loss in the period

This Answer is Correct If the acquirer is required to replace share-based payments, and no further service is required of the employees, the share-based payments are treated as part of the consideration transferred in the acquisition. The amount should be capitalized as a cost of acquisition of the acquiree.

Can please explain in a very easy way why Able accounts for the the shares of stock issued as replacement awards to employees of Bailey as a cost of acquisition regardless of explanation above because I don't understand it?