Question

Issuing stock for assets other than cash

Tom Yuppy, a wealthy investor, exchanged a plot of land that originally cost him $25,000 for 1,000 shares of $10 par common stock issued to him by Leuig Corp. On the same date, Leuig Corp. issued an additional 2,000 shares of stock to Yuppy for $25 per share.

Required

a. What was the value of the land at the date of the stock issue?

b. Show the effect of the two stock issues on Leuig’s books in a horizontal statements model like the following one. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element was not affected by the event.

c. Prepare the journal entries to record these transactions.

Answer 1

Exchange of assets for common stock

Common stock: The amount invested in the corporation by an investor to receive a return or share of profit from the profits earned by the corporation is known as common stock. The common stockholders enjoy the ownership of a company but do not have any preference while receiving dividends.

a.

Compute value of land on the date of issue.

b.

Effect of stock issues on financial statements:

Working Notes:

Refer to requirement (a) for value and computation of land amount.

Compute the amount of common stock for exchange of land.

…… (1)

Compute the amount of paid-in capital in excess of par.

Note: Refer to Equation (1) for value and computation of common stock value and requirement (a) for computation of value of land.

Compute the total amount of cash received by issuance of common stock.

…… (2)

Compute the amount of additional common stock issued.

…… (3)

Compute the amount of paid-in capital in excess of par.

Note: Refer to Equation (3) for value and computation of common stock value and Equation (2) for computation of cash received by common stock issuance.

c.

Journalize the stock transactions in the books of Corporation L.

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
		Land		25,000
		Common Stock			10,000
		Paid-in Capital in Excess of Par			15,000
		(To record exchange of land for common stock)

Date	Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
		Cash		50,000
		Common Stock			20,000
		Paid-in Capital in Excess of Par			30,000
		(To record issuance of common stock)

Note: Refer to requirement (a) for all values.