Question

Twenty-five thousand shares reacquired by Bremer Corporation for $53 per share were exchanged for undeveloped land that has an appraised value of $1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized exchange.
Required:

(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

Solution and Explanation:

a)    

Date  Account Head & Description  Debit Amount Credit Amount

Land Debit (62 multiply 25000)                           1550000  

Treasury Stock Credit (53 multiply25000)                          1325000

Paid - in Capital from treasury stock Credit

(1550000 minus1325000)                                                            225000

(To record purchase of land)    

b)  One might use the cost of treasury stock. However, this is not a relevant measure of this economic event. Rather, it is a measure of a prior, unrelated event. 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 transaction.