Recording Equipment Acquisition-Journal Entry for Stock Issuance

Question:

Dolly’s Best issued 200 shares of its $10 common stock in exchange for used packaging equipment with a fair market value of $2,400. The entry to record the acquisition of the equipment would include a:

a) Debit to Equipment for $2,000

b) Debit to Paid-in Capital in Excess of Par for $400

c) Credit to Common Stock for $2,400

d) Debit to Equipment for $2,400

Answer: d) Debit to Equipment for $2,400

Explanation:

When a company acquires equipment by issuing stock, the equipment should be recorded at its fair market value, which is the value of the stock issued. Here’s how to record this transaction:

Debit Equipment: The equipment should be recorded at its fair market value of $2,400. This value represents the amount the company would have paid if it had purchased the equipment with cash. Therefore, the Equipment account is debited for $2,400 to reflect the increase in assets.

Credit Common Stock and Additional Paid-in Capital: Since the common stock has a par value of $10 per share, and 200 shares are issued, the total par value of the stock issued is $2,000 (200 shares x $10 par value). The remaining amount ($2,400 fair market value – $2,000 par value = $400) is credited to Paid-in Capital more than Par.

So, the complete journal entry would be:

Debit Equipment for $2,400 (to record the equipment at its fair market value)

Credit Common Stock for $2,000 (to record the par value of the issued shares)

Credit Paid-in Capital over Par for $400 (to record the excess of the fair market value over the par value)

Why the Other Options Are Less Accurate:

a) Debit to Equipment for $2,000: This option is incorrect because the equipment should be recorded at its fair market value of $2,400, not just the par value of the stock.

b) Debit to Paid-in Capital over Par for $400: This option is incorrect because Paid-in Capital over Par should be credited, not debited.

c) Credit to Common Stock for $2,400: This option is incorrect because the Common Stock should be credited only for the par value of the shares issued ($2,000), not the total fair market value.

The correct entry to record the acquisition of the equipment in exchange for common stock includes debiting Equipment for the fair market value of $2,400, accurately reflecting the value of the assets acquired.