Question

1. Geiger, a publicly-traded company, acquired a machine from Counter. Geiger gave Counter 10,000 shares of Geiger’s $1 par value common stock in exchange for the machine. At the time of the aquisition, Geiger’s stock had a market value of $25 per share. At the time of the acquisition, several appraisers valued the machine at $253,000. Prepare the entry Geiger should make to record its acquisition of the machine.

2. Tide, a non-publicly-traded company, acquired a machine from Roll. Tide gave Roll 10,000 shares of Tide’s $1 par value common stock in exchange for the machine. At the time of the aquisition, Tide’s stock had a market value of $25 per share. At the time of the acquisition, several appraisers valued the machine at $253,000. Prepare the entry Tide should make to record its acquisition of the machine.

Answer 1

As per Accounting Standard, "Fixed asset acquired in exchange for shares or other securities in the enterprise should be recorded at its fair market value, or the fair market value of the securities issued, whichever is more clearly evident.

A. In the given case, it has given that the Geiger's stock has a market value is $ 25 per share and share is publicly traded. It means the share price is more clearly evident so the consideration amount will be calculated on the basis of shares issued by Geiger. Asset will be booked at $250000 i.e $25 x 10000. Journal entries will be made as follows in Gieger's Books:

1st entry: For buying the machine from counter:

Machine A/c Dr. $250000

to Counter A/c $250000

(Being the purchase of the machine from the Counter)

2nd Entry: For issuing share capital in consideration of Machine

Counter A/c Dr $250000

To Share Capital $10000 [Par value of Share x No. of Shares issued]

To Securities Premium A/c $240000 [(Market Price per Share- Par value of Share) x No. of shares issued]

(Being shares issued to Counter in consideration of Machine Purchased)

B. In the given case, it has given that the Tide's stock has a market value is $ 25 per share but share is not publicly traded. It means the share price is not clearly evident so the consideration amount will be calculated on the basis appraisers valuation i.e $253000. Now, Asset will be booked at $253000. Journal entries will be made as follows in Tide's Books:

1st entry: For buying the machine from Roll:

Machine A/c Dr. $253000

to Counter A/c $253000

(Being the purchase of the Machine from Roll)

2nd Entry: For issuing share capital in consideration of Machine

Roll A/c Dr $253000

To Share Capital $10000 [Par value of Share x No. of Shares issued]

To Securities Premium A/c $243000

(Being shares issued to Roll in consideration of Machine Purchased)