Issuing Common Stock for Assets or Services - Video Tutorials & Practice Problems
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Exchanging Common Stock for Assets Other than Cash
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So sometimes we might not receive cash. When we issue common stock, we might exchange common stock for maybe a piece of land. Right? Maybe we'll receive assets that are not cash or maybe we'll receive services. Maybe we'll have a lawyer that works for us. And instead of paying him in cash we give him common stock in the company. These are common examples. And let's see how we account for those. So it's gonna still be very similar. We're still issuing common stock. So we're gonna have increases in our equity, right? We're issuing shares of common stock or equity is gonna increase. But now we're not receiving cash, we're going to receive a different amount of value and that depends on what we receive. Right? We might receive an asset like I said like land or we might receive services. Well the amount that we receive is going to be the market value sometimes called the fair value, the market value. And I'll put here fair market value um of the assets or services received. Okay So you always want to focus on what did we receive and what did we receive at that market price? What was it worth on the market? That's gonna be the value we received in this exchange. Okay. So we're still gonna have just like when we issued common stock for for cash we're still gonna have our par value and the par value. Um This is still gonna go into the common stock account just like we did before right? The common stock account gets the par value and anything in excess the additional paid in capital. Well, this is the amount above the par value. So you're gonna see this journal entry is very similar to when we received cash for the common stock. Except now. The only thing we have to pay attention to is what is the market value of what we received instead of cash. Okay. So let's try this first example right here. So this is when we receive some sort of asset. And a trick that professors like to use is they'll give you the book value that the seller had. So maybe we're receiving a building and they'll tell us, oh the book value on the seller's books was this much? But remember we don't care about that book value. We care about what is it worth today. What is the market value of what we received? Okay, so that's always going to be the focus here. So let's check it out. How they try and trick us in this question. The apartment depot exchanged 100,000 shares of 50 cent par value common stock for a building. So notice we didn't get cash. This time we got a building. The building had an original cost of 100 and $20,000 while being depreciated Using the straight line method. Over a 20 year useful life accumulated depreciation is currently $48,000. The fair market value of the building is $80,000. There it is. Right. Fair market value of the building is $80,000. That's what we received. We receive that fair market value today regardless of what the book value was to the seller. So in essence, all of this sentence was just extra information. We didn't need any of this information. They could have just told us the fair market value of the building was $80,000. Well that's what we received. We received an $80,000 building and then we'll deal with the depreciation on our books on that value. And what did we give up? We gave up the shares of common stock. Right. So our journal entry is gonna look very similar to when we got cash except now instead of receiving cash, our debit is going to be to building right to some sort of fixed asset account like buildings. And then we're going to credit just like before our common stock account to hold the par value and then we're gonna have additional paid in capital for everything above par. Right? So notice the only thing that's changed here is that instead of cash we received a building right? But our journal entry looks very much the same. Cool. So the first thing we want to do is find out how much the par value was. Right? We already know what the fair market of the building was gonna be. So we know what our debit is gonna be. Is the fair market of the building. Well what is going to be the common stock amount? So common stock, That's Gotta have the par value of the common stock in there. So we gave up 100,000 shares. That had a par value of 50 cents per share. So that comes out to $50,000. That goes into the common stock account, right? And a pick is going to be everything else. So at this point we know the building is gonna have a debit of 80,000, right? Because that was the fair market value of the building. And the common stock account gets the par value of the common stock which was 50,000. Like we just calculated. So a pic is gonna be the rest of the credit. Right? This doesn't balance yet. The par value was less than the total amount we received of 80,000 in value. So what we need to do is we need the difference to be the apec. Right? So a pick is just gonna equal the 80,000. It's a plug. Right? We just need to balance out our equation 80,000. We received minus 50,000 in par value. Well, a pick is gonna be 30,000. Right? So that's what it is in this equation right here And now we're balanced. Right? We received a building worth 80,000 and we issued common stock in that amount. Cool. All right. So what did we see, we see our assets notice instead of cash going up here, we have a building account going up by 80,000. And on the other side, we have the common stock account holding the par value of 50,000 for those shares. And then the a pick account holding all the extra value. A pick holding 30,000. And our equation stays balanced here. Our assets are increasing, our assets equals that increase in equity there. Cool. Alright. Let's pause real quick and then we'll try one with services received. All right. It's a little bit different with services received. So, let's check that out.
2
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Exchanging Common Stock for Services
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3m
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Alright now let's try this one with services received. So the value of the services should be expensed in the period, the benefit is received right? Just like we're used to with expenses. If we receive the benefit, what we're going to have an expense. So let's check out the example the apartment depot exchange, 200,000 shares of 50 cent par value. Common stock for legal services with a fair market value of $140,000. So if we hadn't paid him in common stock we would have had to pay him in cash of $140,000. So the value of these services is $140,000, right? But in this case What what is going to be the debit? We receive these legal services and we're gonna assume that we already used the legal services, right? We were in court and we had to pay this lawyer. Well we would have had to pay him 140,000. We would have had a legal expense which would be a debit. Right? Our expenses have debits legal expense for that $140,000. Now, how do we balance this? It's not like we paid them in cash, we paid them in common stock. Right? So let's see what the value of that common stock is. The common stock, just like before we're gonna have the same entry right now. Instead of having cash or building in our debit, we have legal expense but our credits are still common stock and a pick. Just like we're used to write the common stock is gonna get the par value. A pick is gonna get everything extra. So let's go ahead and do that. Common stock. What's gonna be the amount that goes into common stock here? How do we do this? We're gonna take the 200,000 shares issued times the par value, right? 200,000 shares times the par value of 50 cents per share. That gives us 100,000 in the common stock account. So that will be the credit to the common stock account. Is this par value of those shares? And now everything extra is going to be a pick. Right? So a pic is just a plug in our equation. That makes it balance 140,000 value received -100000 in par value leaves us with 40,000. That is our a pick. So that will be the last credit here to a pick. That balances out our equation. And it's as easy as that, right? So notice in this one we didn't receive an asset, right? There's no asset. Uh to increase what happened is we have this legal expense. Where does that fall in? It's gonna fall under equity. Right, Let me get out of this way. So we have this expense, legal expense that's decreasing our equity because it's gonna go through the income statement and decreased our net income by 100 40,000. But then we had an increase in equity of 140,000 through the common stock account that went up by 100,000 And a pick. That went up by 40,000, Right? So that balances out our equity decreased by 140,000 for the expense. But then it also increased by 140,000 for the common stock issue. Alright, so a little bit different when we receive stuff that's not cash, but in essence, our journal entry looks very similar. Cool, Let's go ahead and move on to the next video.
