Question

Q 11.35: Felix Incorporated has just exchanged 1,250 shares of $65 par-value preferred stock for a parcel of land advertised for a price of $90,000. If the current market value of the stock is $75 per share, how should Felix journalize this transaction

Answer 1

Answer:

Felix Incorporated

Exchange of Preferred Stock for Land:

Journal Entries:

Debit Land $90,000

Credit Preferred Stock $81,250

Credit Additional Paid-in Capital - Preferred Stock $8,750

To record the issue of 1,250 of $65 par-value preferred stock for land with a fair price of $90,000.

Explanation:

Felix Incorporated will debit Land with the fair price of $90,000 and Credit the Preferred Stock account with $81,250 (1,250 x $65) at par-value.  The difference between the fair price of land and the preferred stock at par-value is credited to additional paid-in capital account for preferred stock.  Felix Incorporated cannot take into account the current market value of the stock at $75 in its accounting records.  The current share price of $75 is for the benefit of investors, and can only serve as basis for Felix Incorporated to decide transactions with potential investors.