CA15-2 (Issuance of Stock for Land) Martin Corporation is planning to issue 3,000 shares of its...

CA15-2 (Issuance of Stock for Land) Martin Corporation is planning to issue 3,000 shares of its own $10 par value common stock for two acres of land to be used as a building site.

Instructions

(a)What general rule should be applied to determine the amount at which the land should be recorded?

(b)Under what circumstances should this transaction be recorded at the fair value of the land?

(c)Under what circumstances should this transaction be recorded at the fair value of the stock issued?

(d)Assume Martin intentionally records this transaction at an amount greater than the fair value of the land and the stock. Discuss this situation.

Solutions

Expert Solution

(PART-A) Answer: The general rule that should be applied while the determination of the amount at which the land need to be recorded -- Is stock is issued for property or services other than cash the fair value of the stock, or the fair value of the prop services, whichever amount is more clearly determinable.

(PART-B) Answer: The transaction should be recorded at the fair value of the land when the fair market value of the land is readily determinable. In such scenario, fair market value of the land can be determined with the consideration of the cash sales prices of pieces of property that have been sold, or by obtaining independent appraisals.

(PART-C) Answer: When the fair value of the land is not readily determinable, however the fair value of the stock issued is readily available, in those circumstances the fair value of the stock issued must be used for recording this transaction. When stock is traded on over-the counter market recent sales or bids, should be used when determining the fair value. When stock is traded on as exchange this is determined at the fair value by using the current day’s cash sales of the stock.

(PART-D) Answer: Assuming Martin intentionally records this transaction at an amount which exceeds the fair value of the land and the both the organizations assets stockholders’ equity will be overstated. If company intentionally overvalues stockholders’ equity the process is referred to as watered stock. To rectify the overstatement then the overvalued asset must be written down against the appropriate paid-in capital account.

ekkarill92 answered 10 months ago

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