Question

Forest Construction Ltd. issued 5,000 common shares in exchange for a parcel of land on January 27. The shares were trading at $3.50 per share and the fair value of land was $20,000 on the date of the acquisition. The assessed value of the land for the property tax purpose is $15,000. The journal entry to record the transaction would include a

Question 38 options:

	debit Land $15,000
	credit Common Shares $ 17,500.
	credit Common Shares $20,000
	debit Loss on Land Acquisition $5,000

Answer 1

Answer:- credit Common Shares $ 17,500

Explanation:- The fixed assets are initially recognised at its fair value on purchase date. The assessed value of the land for the property tax purpose is not relevant for accounting in books. So, land should be recognised at $20,000

Common shares will be credited (since common shares outstanding increases after issue) according to its per share value and shares issued. So, common shares will be credited for $3.5 x 5,000 shares = $17,500

The company only paid a value pf $17,500 on purchase of an asset worth $20,000. So, the gain is credited to "Gain on land acquisition"

Journal entry would be:

Land $20,000(Debit)

Common shares $17,500(Credit)

Gain on land acquisition $2,500(Credit)