Question

E15 3B (L0 1) (Stock Issued for Land) Twenty thousand shares reacquired by Sierra Land Inc. for $153 per share were exchanged for land that has an appraised value of $3,600,000. At the time of the exchange the common stock was trading at $176 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

Answer 1

Answer and Explanation:

(a)

Dr Land ($176 X $20,000) $3,520,000

Cr Treasury Stock ($153 X $20,000) $3,060,000

Cr Paid-in Capital from Treasury Stock $460,000

b)

Cost of treasury stock might be used although , this is not a relevant measure of this economic event but it is a measure of a prior, unrelated event. Therefore the appraised value of the land is a reasonable alternative if based on appropriate fair value estimation techniques. However, it is an appraisal as opposed to a market-determined price. The trading price of the stock is probably the best measure of fair value in this type of transaction.