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Chapter 15: Question CE15-2 (page 823)

(Issuance of Stock for Land) Martin Corporation is planning to issue 3,000 shares of its own $10 par value common stock for two acres of land to be used as a building site.

Instructions

  1. What general rule should be applied to determine the amount at which the land should be recorded?
  2. Under what circumstances should this transaction be recorded at the fair value of the land?
  3. Under what circumstances should this transaction be recorded at the fair value of the stock issued?
  4. Assume Martin intentionally records this transaction at an amount greater than the fair value of the land and the stock. Discuss this situation.

Short Answer

Expert verified

Martin Corporation has applied the general rule of recording assets at market price level at the time stock is granted. It was also involved in the issuance of stock in exchange for nonmonetary assets.

Step by step solution

01

Meaning of Common stock

Common stock is represented as the owner of the company, who selects the board of directors andreceives voting benefits on corporate policies. In the liquidation of the company, common shareholders are paid after the preferred shareholders.

02

Explaining transaction (a)

When stock is issued in exchange for services or property other than cash, the general rule is that the asset or services are recorded at market price value at the time the stock is granted, whichever can be more explicitly determined.

03

Explaining transaction (b)

Market price value of the land is used as the basis for registration of the transaction if it is easily determined. Market price value of an asset can be estimated by analyzing cash sale prices or through an independent appraisal.

04

Explaining transaction (c)

If market price value of the land cannot be determined but market price value of the stock issued can be, then market price value of the stock is used to record the exchange. If the stock is traded on a stock exchange, the fair value can be calculated using that day's cash sales. Recent sales or bid prices might be used to assess market price value if the stock is traded over the counter.

05

Explaining transaction (d)

If Martin reports this transaction at a price that is higher than its fair worth, both assets and stockholders' equity will be exaggerated. Watered stock refers to the overvaluation of stockholders' equity as a result of the inflated asset value. This surplus can be removed by depreciating the overpriced assets and charging the equivalent amount to the relevant paid-in capital accounts.

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Most popular questions from this chapter

Seles Corporation’s charter authorized issuance of 100,000 shares of \(10 par value common stock and 50,000 shares of \)50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.

  1. Issued a \(10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for \)106 a share.
  2. Issued 500 shares of common stock for equipment. The equipment had been appraised at \(7,100; the seller’s book value was \)6,200. The most recent market price of the common stock is \(16 a share.
  3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to \)10,800. The common had been selling at \(14 and the preferred at \)65.
  4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of \(16 per share; the equipment has a fair value of \)6,500.

Instructions

Record the transactions listed above in journal entry form.

Lindsey Hunter Corporation is authorized to issue 50,000 shares of \(5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions.

  1. Issued 5,000 shares of stock at \)45 per share, less costs related to the issuance of the stock totaling \(7,000.
  2. Issued 1,000 shares of stock for land appraised at \)50,000. The stock was actively traded on a national stock exchange at approximately \(46 per share on the date of issuance.
  3. Purchased 500 shares of treasury stock at \)43 per share. The treasury shares purchased were issued in 2013 at $40 per share.

Instructions

  1. Prepare the journal entry to record item 1.
  2. Prepare the journal entry to record item 2.
  3. Prepare the journal entry to record item 3 using the cost method.

Ravonette Corporation issued 300 shares of \(10 par value ordinary shares and 100 shares of \)50 par value preference shares for a lump sum of \(13,500. The ordinary shares have a market price of \)20 per share, and the preference shares have a market price of $90 per share.

Instructions

Prepare the journal entry to record the issuance.

(Stock and Cash Dividends) Earnhart Corporation has outstanding 3,000,000 shares of common stock with a par value of \(10 each. The balance in its Retained Earnings account at January 1, 2017, was \)24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of \(5,000,000. During 2017, the company’s net income was \)4,700,000. A cash dividend of \(0.60 a share was declared on May 5, 2017, and was paid June 30, 2017, and a 6% stock dividend was declared on November 30, 2017, and distributed to stockholders of record at the close of business on December 31, 2017. You have been asked to advise on the proper accounting treatment of the stock dividend.

The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.

October 31, 2017 \)31

November 30, 2017 \(34

December 31, 2017 \)38

Instructions

  1. Prepare the journal entry to record the declaration and payment of the cash dividend.
  2. Prepare the journal entry to record the declaration and distribution of the stock dividend.
  3. Prepare the stockholders’ equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2017 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.

The following note related to stockholders’ equity was reported in Wiebold, Inc.’s annual report.

On February 1, the Board of Directors declared a 3-for-2 stock split, distributed on February 22 to shareholders of record on February 10. Accordingly, all numbers of common shares, except unissued shares and treasury shares, and all per share data have been restated to reflect this stock split.

On the basis of amounts declared and paid, the annualized quarterly dividends per share were \(0.80 in the current year and \)0.75 in the prior year.

Instructions

  1. What is the significance of the date of record and the date of distribution?
  2. Why might Wiebold have declared a 3-for-2 for a stock split?
  3. What impact does Wiebold’s stock split have on (1) total stockholders’ equity, (2) total par value, (3) outstanding shares, and (4) book value per share?
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