Question

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.

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.

Short answer

The acquisition of land should be debited with the amount of $1,550,000,and treasury stock and paid-in capital from the treasury stock account should be credited with $1,325,000 and 225,000,respectively.

Step-by-step solution

Meaning of Common Stock

An ownership interest in a corporation is represented by common stock. Board members are elected by common stockholders, who vote on corporate policies.

Preparing Journal Entries

Date	Particular	Debit ($)	Credit ($)
	Land A/c	1,550,000
	To Treasury Stock		1,325,000
	To Paid-in Capital from Treasury stock A/c.		225,000
	(being share issued)

Identifying the possible alternative for quantifying the cost of the land

Taking into account the cost of treasury stock might be used. This, however, is not a useful metric for this economic event. It is a measure of a previous, unrelated occurrence.

Although the land’s estimated value is a suitable alternative (if based on appropriate fair value calculation procedures), it is an appraisal rather than a market-determined price. The stock's market price is most likely the greatest fair value indicator of the transaction.