Issuing Common Stock for Assets or Services - Online Tutor, Practice Problems & Exam Prep

When issuing common stock for non-cash assets or services, the transaction is recorded at the fair market value of what is received. For example, if 100,000 shares with a par value of $0.50 are exchanged for a building valued at $80,000, the journal entry includes a debit to the building account and credits to common stock and additional paid-in capital (APIC). Similarly, if legal services valued at $140,000 are received, a legal expense is recorded, balancing the entry with common stock and APIC. This process maintains the accounting equation, ensuring assets equal equity.

Exchanging Common Stock for Assets Other than Cash

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 going to still be very similar. We're still issuing common stock, so we're going to have increases in our equity, right? We're issuing shares of common stock, our equity is going to 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, 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 going to be the value we received in this exchange. Okay? So we're still going to have just like when we issued common stock, for cash, we're still going to have our par value and the par value, this is still going to 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. Value. So you're going to 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 sellers' 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¢ 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 $120,000 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 received 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 these shares of common stock, right? So our journal entry is going to 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 going to 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 debit is going to be is the fair market of the building. Well, what is going to be the common stock amount? So common stock, that's got to have the par value of the common stock in there. So we gave up 100,000 shares that had a par value of 50¢ per share, so that comes out to $50,000 that goes into the common stock account, right? And APIC is going to be everything else. So at this point, we know the building is going to 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 APIC is going to 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 APIC, right? So APIC is just going to equal 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, APIC is going to 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? Alright. 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 APIC account holding all the extra value. APIC holding 30,000 and our equation stays balanced here. Our assets our increase in our assets equals that increase in equity there. Cool? Alright. Let's pause real quick, and then we'll try one with services received. Alright? It's a little bit different with services received, so let's check that out.

Exchanging Common Stock for Services

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, well, we're going to have an expense. So let's check out the example. The Apartment Depot exchanged 200,000 shares of 50¢ 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 is going to be the debit? We receive these legal services, and we're going to 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 going to 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 APIC just like we're used to, right? The common stock is going to get the par value, APIC is going to get everything extra. So let’s go ahead and do that.

Common stock, what's going to be the amount that goes into common stock here? How do we do this? We're going to take the 200,000 shares issued times the par value, right? 200,000 shares times the par value of $0.50 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 APIC, right? APIC is just a plug in our equation that makes it balance. A $140,000 value received minus $100,000 in par value leaves us with $40,000, that is our APIC. So that will be the last credit here to APIC 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 to increase. What happened is we have this legal expense. Where does that fall in? It’s going to 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 going to go through the income statement and decrease our net income by $140,000, but then we had an increase in equity of $140,000 through the common stock account that went up by $100,000 and APIC 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 issued. 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.

Here’s what students ask on this topic:

What is the journal entry for issuing common stock in exchange for a non-cash asset?

When issuing common stock for a non-cash asset, the journal entry records the fair market value of the asset received. For example, if 100,000 shares with a par value of $0.50 are exchanged for a building valued at $80,000, the entry would be:

$•\text{Debit Building: \$80,000}$

$•\text{Credit Common Stock: \$50,000}$

$•\text{Credit Additional Paid-In Capital (APIC): \$30,000}$

This ensures the accounting equation remains balanced, with assets equaling equity.

How do you account for issuing common stock in exchange for services?

When issuing common stock for services, the transaction is recorded at the fair market value of the services received. For example, if 200,000 shares with a par value of $0.50 are exchanged for legal services valued at $140,000, the entry would be:

$•\text{Debit Legal Expense: \$140,000}$

$•\text{Credit Common Stock: \$100,000}$

$•\text{Credit Additional Paid-In Capital (APIC): \$40,000}$

This entry reflects the expense incurred and the increase in equity through common stock and APIC.

What is the fair market value in the context of issuing common stock for assets or services?

The fair market value (FMV) is the price at which an asset or service would trade in an open market. When issuing common stock for assets or services, the FMV of what is received determines the transaction's value. For instance, if a building's FMV is $80,000, this amount is used in the journal entry, regardless of the asset's book value to the seller. Similarly, for services, the FMV of the services provided is used to record the transaction.

How do you calculate Additional Paid-In Capital (APIC) when issuing common stock for non-cash assets?

To calculate Additional Paid-In Capital (APIC) when issuing common stock for non-cash assets, subtract the par value of the issued shares from the fair market value of the asset received. For example, if 100,000 shares with a par value of $0.50 are issued for a building valued at $80,000, the APIC is calculated as follows:

$\text{APIC = FMV of Asset - (Number of Shares × Par Value)}$

$\text{APIC = \$80,000 - (100,000 × \$0.50) = \$80,000 - \$50,000 = \$30,000}$

This $30,000 is recorded as APIC in the journal entry.

Why is the book value of an asset not used when issuing common stock for non-cash assets?

The book value of an asset is not used when issuing common stock for non-cash assets because it reflects the asset's historical cost minus accumulated depreciation, not its current market value. The fair market value (FMV) represents the asset's current worth in an open market, providing a more accurate measure of the value received. For example, if a building's book value is $72,000 but its FMV is $80,000, the FMV is used to ensure the transaction reflects the true economic value exchanged.