Definition
The term acquiring assets with stock is used to describe the purchase of assets such as plant, property and equipment by a company through the issuance of securities. In order to value the assets purchased, accountants will use either the market value of the securities, or the appraised value of the asset acquired.
Explanation
Companies have the ability to purchase assets such as plant, property and equipment in exchange for securities such as common stock. When this occurs, the cost of the property acquired should not be determined using the par value of the security. The acquisition price should be determined using one of two methods:
Market Price: if the company's stock is actively traded, a market value of each share can be readily determined. This market value should be used as a cash equivalent for each share issued when acquiring the property.
Appraised Value: if the company's stock is not actively traded, or it's not possible to determine its true market value, the appraised value of the asset should be used as the basis for the common stock's worth when recording the transaction.
Example
Company A has entered into an agreement to purchase a widget processor from Company XYZ in exchange for 3,000 shares of common stock in Company A, which has a par value of $0.12 per share. At the time of the transaction, Company A's common stock was trading at $34.00 per share.
The journal entry to record the transaction would be:
Debit | Credit | |
Equipment (3,000 shares x $34.00 per share) | $102,000 | |
Common Stock (3,000 shares x $0.12 per share) | $360 | |
Additional Paid-in Capital | $101,640 |
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024
The financial accounting term additional paid-in capital refers to the amount paid in excess of par value by investors when capital stock is first issued. There are a number of subsequent transactions that can also affect the balance of this account. Additional paid-in capital appears in the owner's equity section of the company's balance sheet.Moneyzine EditorJanuary 4th, 2024
The financial accounting term exchanges of plant, property, and equipment refers to the process of valuing nonmonetary assets that have been transferred between two companies. When this type of exchange occurs, accountants can choose from several approaches to valuing the property involved in the transaction, including using fair market value or book value.Moneyzine EditorJanuary 17th, 2024- The financial accounting term nonreciprocal transfers refers to the disposition or acquisition of an asset through a donation or a gift. Companies can both donate property as well as receive gifts of property. These are referred to as nonreciprocal transfers because the transaction occurs in one direction.Moneyzine EditorSeptember 20th, 2023
