Question

When a closely held corporation issues preferred stock for land, the land should be recorded at the

A) Historical cost
B) Book value
C) Fair market value
D) Par value

Answer 1

The land acquired by issuing preferred stock should be recorded at the fair market value of the stock. Historical cost and book value are not used in this situation because they do not reflect the current transaction. Par value is also not suitable as it does not necessarily equate to the market value of the stock or land.

Step-by-step explanation:

When a closely held corporation issues preferred stock for land, the land should be recorded at the fair market value of the preferred stock issued. This is because the exchange of the stock for land is a non-monetary transaction where a market value can be determined, and accounting standards require that assets be recorded at fair value when acquired in such exchanges.

The use of historical cost would apply if the land had been purchased with cash, whereas the book value relates to the value of an asset as recorded on the company's books, which may not reflect current value. Par value is a legal accounting value assigned to the stock which may not represent its fair market value and therefore is not appropriate for recording the land acquisition.