When a company issues common stock, it typically receives cash in return. However, there are instances where the company may exchange common stock for non-cash assets, such as land or services. In these cases, the accounting treatment remains similar, but the value received is based on the fair market value of the assets or services exchanged rather than cash. This fair market value represents the current worth of what the company receives in the transaction.
In accounting for these transactions, the par value of the common stock is recorded in the common stock account, while any amount received above the par value is recorded as additional paid-in capital (APIC). The journal entry for such transactions will reflect the fair market value of the asset or service received, which is crucial for accurate financial reporting.
For example, consider a scenario where a company, referred to as Apartment Depot, exchanges 100,000 shares of common stock with a par value of $0.50 for a building. The fair market value of the building is determined to be $80,000, despite its original cost and accumulated depreciation being irrelevant for this transaction. The journal entry would involve debiting the building account for $80,000, crediting the common stock account for the par value of $50,000 (100,000 shares x $0.50), and crediting the APIC account for the remaining balance of $30,000. This ensures that the accounting equation remains balanced, with total assets equaling total equity.
In summary, when common stock is issued for non-cash assets, the key focus is on the fair market value of what is received. The accounting entries reflect this value, maintaining the integrity of the financial statements while ensuring that the equity section accurately represents the company's capital structure.