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Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 10171
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Not a tax question....an accounting question for how to

Customer Question

not a tax question....an accounting question for how to properly account for something from a GAAP perspective?
JA: The Accountant will know how to help. Please tell me more, so we can help you best.
Customer: Ok here goes. Company 1 acquires the assets (not the corp) of Company 2 and from a tax standpoint, we pay a monthly consulting fee to Company 2 until we reach $250,000. $10,000 a month is paid for 25 months. How should Company 1 account for this. Currently Company 1 is allocating it has an expense on a Sub P&L for Company 2 so that the expense shows on Company 2 not Company 1. That seems unusual to me.
JA: Is there anything else the Accountant should be aware of?
Customer: I don't think so. But a bit more context. I'm responsible for the Sub P&L for the assets of Company 2. I don't like that Company 1 is allocated its purchase/expense against my P&L. Seems to be double dipping if that makes sense.
Submitted: 2 months ago.
Category: Finance
Expert:  Lane replied 2 months ago.

Hi,

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I'm having a little trouble completely following you, but the bot***** *****ne here is that if Company 2 IS paying the consulting fee to company 1, it IS an expense of company 2 or one of it's controlled group (subs, or any org owned at least by comnany 2)

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This IS done many times, as part of a sales transaction (for assets OR shares) when what company sold to company 1 something that still needs that expertise to carry a value.

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It's very possible that the sale was made at a price that would not be valid without the consulting agreement, hence sold at a higher price than what the assets would be sold for, if the offsetting conaulting agreement weren't there (thereby making both entities whole).

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Bot***** *****ne, (regardless of what the countless things that sales negaotiations could have generated, to make the deal work for both sides), if company 2 is paying company 1 for a consulting agreement, it IS company 2's expense.

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Let me know iif I've understood your question correctly

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Lane

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I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986

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