Question

A company acquires land by issuing 10,000 shares of its $10 par value common stock, currently trading at $20 per share, with an appraised value of $250,000. Choose the option that correctly describes the recording of the land:

a. Record the land at its appraised value of $250,000 and recognize a gain of $50,000 since the issued stock is currently worth $200.
b. Record the land at the $200,000 value of the consideration given.
c. Record the land at the par value of the stock given up, $100.
d. Record the land at the average of its appraised value of $250,000 and the $200,000 value of the stock issued, thereby recognizing a $25,000 gain.

Answer 1

The acquisition of land through issuing common stock is recorded at the fair value of the consideration given, which is the market value of the shares issued. In this case, the land should be recorded at $200,000, which is the value of the 10,000 shares at $20 per share, with no gain recognized.

Step-by-step explanation:

When a company acquires land by issuing shares, the land should be recorded at the fair value of the consideration given, which is typically the market value of the shares at the time of the transaction. In this scenario, the company is issuing 10,000 shares of its $10 par value common stock which is currently trading at $20 per share. Therefore, the correct accounting entry would record the land at the fair value of the shares issued, which amounts to $200,000 (10,000 shares × $20 per share). Thus, the correct answer is:

b. Record the land at the $200,000 value of the consideration given.

This approach follows the accounting principle that assets and services received should be recorded at their fair value. There is no gain recognized on the issuance of stock for land because this transaction is not a sale but an exchange of non-monetary assets.