(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.
Martin Corporation has applied the general rule of recording assets at market price level at the time stock is granted. It was also involved in the issuance of stock in exchange for nonmonetary assets.
Common stock is represented as the owner of the company, who selects the board of directors and receives voting benefits on corporate policies. In the liquidation of the company, common shareholders are paid after the preferred shareholders.
When stock is issued in exchange for services or property other than cash, the general rule is that the asset or services are recorded at market price value at the time the stock is granted, whichever can be more explicitly determined.
Market price value of the land is used as the basis for registration of the transaction if it is easily determined. Market price value of an asset can be estimated by analyzing cash sale prices or through an independent appraisal.
If market price value of the land cannot be determined but market price value of the stock issued can be, then market price value of the stock is used to record the exchange. If the stock is traded on a stock exchange, the fair value can be calculated using that day's cash sales. Recent sales or bid prices might be used to assess market price value if the stock is traded over the counter.
If Martin reports this transaction at a price that is higher than its fair worth, both assets and stockholders' equity will be exaggerated. Watered stock refers to the overvaluation of stockholders' equity as a result of the inflated asset value. This surplus can be removed by depreciating the overpriced assets and charging the equivalent amount to the relevant paid-in capital accounts.
(Dividends and Stockholders’ Equity Section) Anne Cleves Company reported the following amounts in the stockholders’ equity section of its December 31, 2016, balance sheet.
Preferred stock, 10%, $100 par (10,000 shares authorized, 2,000 shares issued)
Common stock, $5 par (100,000 shares authorized, 20,000 shares issued)
Additional paid-in capital
During 2017, Cleves took part in the following transactions concerning stockholders’ equity.
(Stock Dividends) Kulikowski Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kulikowski wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board of directors.
Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation’s capital stock.
(Issued 12,000 shares of $5 par value common stock at $16 per share)
(Issued 10,000 shares of $30 par value preferred stock at $60 per share)
(Purchased 1,000 shares of common stock for the treasury at $15 per share)
Gain on Sale of Stock
(Sold 500 shares of treasury stock at $17 per share)
On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.
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