When a business issues common stock in exchange for assets or services, how should the transaction be recorded?

• A. At the historical cost of the assets or services received.
• B. At the book value of the assets or services provided.
• C. At the par value of the common stock issued.
• D. At the fair market value of the assets or services received or the stock issued, whichever is more clearly determinable.

Answer: (D)

Verified step by step guidance

1. Understand the concept of issuing common stock: When a business issues common stock, it is exchanging ownership in the company for assets or services. This transaction needs to be recorded accurately in the financial statements.
2. Identify the measurement principle: Transactions involving the issuance of stock are recorded at fair market value. This ensures that the financial statements reflect the most accurate and reliable valuation of the transaction.
3. Determine the fair market value: The fair market value can be based on either the assets or services received or the stock issued. The choice depends on which value is more clearly determinable and reliable.
4. Record the transaction: Debit the appropriate asset or expense account for the fair market value of the assets or services received. Credit the common stock account for its par value, and credit the additional paid-in capital account for the excess over par value.
5. Ensure compliance with accounting standards: Verify that the transaction is recorded in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the applicable framework.