(Stock Issued for Land) Twenty-five thousand shares reacquired by Elixir 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.
Hint: (LO 3)
Instructions
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.
(a) Land ($62 X 25,000)………………………………………………………………. 1,550,000
Treasury Stock ($53 X 25,000)………………………………………. 1,325,000
Paid-in Capital from Treasury Stock…………………………….. 225,000
(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.
