When a company issues 10,000 shares of common stock in exchange for equipment, how should the transaction be recorded?

• A. Debit Common Stock and credit Equipment for the book value of the equipment.
• B. Debit Cash and credit Common Stock for the par value only.
• C. Debit Equipment and credit Retained Earnings for the fair value of the shares issued.
• D. Debit Equipment and credit Common Stock and Additional Paid-In Capital for the fair value of the equipment.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the nature of the transaction. The company is issuing common stock in exchange for equipment, which means no cash is involved. The equipment is being acquired, and the common stock is being issued as consideration.
2. Step 2: Determine the fair value of the equipment. The fair value of the equipment is the basis for recording the transaction, as it represents the value of the asset being acquired.
3. Step 3: Record the acquisition of the equipment. Debit the Equipment account to reflect the increase in assets. The debit entry represents the fair value of the equipment being added to the company's books.
4. Step 4: Record the issuance of common stock. Credit the Common Stock account for the par value of the shares issued. Par value is the nominal value assigned to each share of stock.
5. Step 5: Record the Additional Paid-In Capital. Credit the Additional Paid-In Capital account for the difference between the fair value of the equipment and the par value of the common stock issued. This account captures the excess value received over the par value of the shares.