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Chapter 15: 3E (page 812)

Twenty-five thousand shares reacquired by Elixir Corporation for \(53 per share were exchanged for undeveloped land that has an appraised value of \)1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized exchange.

Instructions

a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.

b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.

Short Answer

Expert verified

The acquisition of land should be debited with the amount of $1,550,000,and treasury stock and paid-in capital from the treasury stock account should be credited with $1,325,000 and 225,000,respectively.

Step by step solution

01

Meaning of Common Stock

An ownership interest in a corporation is represented by common stock. Board members are elected by common stockholders, who vote on corporate policies.

02

Preparing Journal Entries

Date

Particular

Debit ($)

Credit ($)

Land A/c

1,550,000

To Treasury Stock

1,325,000

To Paid-in Capital from

Treasury stock A/c.

225,000

(being share issued)

03

Identifying the possible alternative for quantifying the cost of the land

Taking into account the cost of treasury stock might be used. This, however, is not a useful metric for this economic event. It is a measure of a previous, unrelated occurrence.

Although the land’s estimated value is a suitable alternative (if based on appropriate fair value calculation procedures), it is an appraisal rather than a market-determined price. The stock's market price is most likely the greatest fair value indicator of the transaction.

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Most popular questions from this chapter

Arantxa Corporation has outstanding 20,000 shares of \(5 par value common stock. On August 1, 2017, Arantxa reacquired 200 shares at \)80 per share. On November 1, Arantxa reissued the 200 shares at $70 per share. Arantxa had no previous treasury stock transactions. Prepare Arantxa’s journal entries to record these transactions using the cost method.

(Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders’ equity.

  1. Recorded accrued interest earned on a note receivable.
  2. Declared a cash dividend.
  3. Declared and distributed a stock split.
  4. Approved a retained earnings restriction.
  5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
  6. Paid the cash dividend declared in item 2 above.
  7. Recorded accrued interest expense on a note payable.
  8. Declared a stock dividend.
  9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.

Item

Asset

Liabilities

Stockholders’ Equity

Paid-in Capital

Retained

Earnings

Net Income

1. Which of the following does not represent a pair of GAAP/ IFRS-comparable terms?

(a) Additional paid-in capital/Share premium.

(b) Treasury stock/Repurchase reserve.

(c) Common stock/Share capital—ordinary.

(d) Preferred stock/Preference shares.

(Preferred Dividends) The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of \(100 par value, 8% preferred, and 5,000 shares of \)50 par value common.

Instructions

Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.

  1. The preferred stock is noncumulative and nonparticipating.
  2. The preferred stock is cumulative and nonparticipating.
  3. The preferred stock is cumulative and participating. (Round dividend rate percentages to four decimal places.)

Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.
See all solutions

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