Question

On December 15, 19x5, FLM Corporation exchanged 2,000 shares of $10 par value common stock for land. The current market price of the stock was $20 per share. The value of the land was not readily determinable. Which of the following entries should be made to record the issuance of the stock?
A) Land 20,000
Common Stock 20,000
B) Land 40,000
Common Stock 40,000
C) Land 40,000
Common Stock 20,000
Paid-in Capital in Excess of Par Value 20,000
D) Cannot be determined.

Answer 1

Answer:

C) Land 40,000  Common Stock 20,000  Paid-in Capital in Excess of Par Value 20,000

Explanation:

The value of the land is determined by the market value of the stocks because the stocks are being exchanged for the land.

The corporation initially  issued the shares for a total of $20,000 (2,000 x $10 par value = $20,000), however, now the market price of the stocks have risen to $20, so the total market value of the stocks is $40,000 (2,000 x $20 par value = $40,000).

The difference between $40,000 and $20,000 is the Paid-in capital in excess of par value.

The journal entries are:

Account                                                         Debit          Credit

Land                                                             $40,000

Common Stock                                                               $20,000

Pain-In Capital in Excess of Par Value                         $20,000