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Chapter 15: Question 9Q (page 810)

What are the different bases for stock valuation when assets other than cash are received for issued shares of stock?

Short Answer

Expert verified

Stock valuation is an important factor to consider while making stock trading decisions. Using this strategy, the company can learn about the worth of stocks traded in the market.

Step by step solution

01

Meaning of Stock Valuation

The process of determining a stock's current (or expected) worth at a specific point in time is known as stock valuation. Absolute and relative valuations are used for valuing equities.

02

Different bases for Stock Valuation

When stock is issued in exchange for services or property other than cash, the property or services should be recorded at their fair valueor the fair value of the shares issued, whichever is more easily determinable.

If neither is easily determined, the board of directors usually decideson the value to be assigned.

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Most popular questions from this chapter

(Computation of Retained Earnings) The following information has been taken from the ledger accounts of Isaac Stern Corporation.

Total income since incorporation $317,000

Cash dividends paid 60,000

Total value of stock dividends distributed 30,000

Gains on treasury stock transactions 18,000

Unamortized discount on bonds payable 32,000

Instructions

Determine the current balance of retained earnings.

(Stock Dividend, Cash Dividend, and Treasury Stock) Mask Company has 30,000 shares of \(10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2017, Mask purchased 1,000 shares of treasury stock for \)18 per share. Mask uses the cost method to account for treasury stock. On September 14, 2017, Mask sold 500 shares of the treasury stock for \(20 per share.

In October 2017, Mask declared and distributed 1,950 shares as a stock dividend from unissued shares when the market price of the common stock was \)21 per share.

On December 20, 2017, Mask declared a $1 per share cash dividend, payable on January 10, 2018, to shareholders of record on December 31, 2017.

Instructions

  1. How should Mask account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet on December 31, 2017?
  2. How should Mask account for the stock dividend, and how would it affect the stockholders’ equity at December 31, 2017? Why?
  3. How should Mask account for the cash dividend, and how would it affect the balance sheet at December 31, 2017? Why?

For what reasons might a corporation purchase its own stock?

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.

  1. What is meant by a stock split effected in the form of a dividend?
  2. From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
  3. How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?

(Recording the Issuance of Common and Preferred Stock) Kathleen Battle Corporation was organized on January 1, 2017. It is authorized to issue 10,000 shares of 8%, \(100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of \)1 per share. The following stock transactions were completed during the first year.

Jan. 10 Issued 80,000 shares of common stock for cash at \(5 per share.

Mar. 1 Issued 5,000 shares of preferred stock for cash at \)108 per share.

Apr. 1 Issued 24,000 shares of common stock for land. The asking price of

the land was \(90,000; the fair value of the land was \)80,000.

May 1 Issued 80,000 shares of common stock for cash at \(7 per share.

Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of

their bill of \)50,000 for services rendered in helping the company

organize.

Sept. 1 Issued 10,000 shares of common stock for cash at \(9 per share.

Nov. 1 Issued 1,000 shares of preferred stock for cash at \)112 per share.

Instructions

Prepare the journal entries to record the above transactions.
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