Question

Noncash Consideration Instructions Chart of Accounts General Journal Analysis Instructions On February 1, 2017, Silicon Rentals contracts with Zurgg Technology to provide 6 months of office services in exchange for 18,000 shares of Zurgg's common stock. The contract is signed on that date and works starts immediately. Silicon appropriately determines that its performance obligation is satisfied over time and each month it receives 3,000 shares of Zurgg Technology common stock. The fair value of Zurgg's common stock at February 28, 2017, and March 31, 2017, is $40 and $31, respectively. 1. Prepare Silicon's journal entries related to recognize service revenue for February and March. 2. Assume that Silicon could not estimate the fair value of Zurgg's common stock. How would Silicon determine fair value?

Answer 1

Step 1

After February 28, 2017, Silicon Rentals received 3,000 shares of Zurgg Technology. As shares are received in lieu of services rendered, there will be no cash transaction.

Hence journal entry will be as under

Investment in Zurgg Technology    Dr    $ 120,000

   To services rendered Cr $ 120,000

( Taking fair value of $ 40 per share)

Step 2

After March 31, 2017, Silicon again received 3,000 shares. But fair value has been reduced to $ 31 per share.

Then Journal entry would be as under

Investment in Zurgg Technology Dr $ 93,000

   To services rendered Cr    $ 93,000

Step 3

When fair value of common stock is not known, the Silicon can rely on perception and research, depending upon the variables which can help in determining the fair value.

following are few method for determining the fair value:

- Adjust share price according to the average P/E ratio.

- Compare the market value in the same industry.

- By analysing financial statements of Zurgg Technology and forecasting the future return.