[salena786]

Hi guys, my exam is tomorrow and I believe this is my weakest area of FAR and it had thrown me off on a sim last exam as well. If someone could please explain how they got this answer I would truly appreciate it, and it will really help me a lot tomorrow. Thanks a lot.

Kansas, Inc stockholder equity balances 12/31 Year 1:

Common stock: $1 par, 150,000 shares authorized, 100,000 issued: $100,000

APIC: $800,000

Additional Info:

*February 1st, Year 2 – Issued 13,000 shares of common stock to Ram Co. in exchange for land. On the date of issuance land had a CV of $135,000, and an assessed value for property taxes of $90,000.

*March 1st, Year 2 – Purchased 5000 shares of its own common tock to be held as treasury stock for $14 per share. Kansas uses the cost method to account for treasury stock.

*October 1st, year 2: Reissued 2,000 shares of treasury stock for $16 per share. (Cost Method)

Question: What is the APIC?

Solution:

$800,000

+ 130,000 (Lands 13,000 shares x $10)

+32000 (2,000 x $16)

– 28000 (2000 x $14)

= $934,000

Confusion –> Is the land exchange for common stock a non monetary exchange, and where do they get the $10 from? Also, where does 2,000 shares come from for $14 when they had purchased 5000 shares. Isn’t the JE for Cost method buy back simply Dr. Treasury Stock Cr. Cash; so where is APIC coming from?

Please help!

[salena786]

Any explanations would really be appreciated, this is my weakest area that I can't seem to overcome.

[excel monkey]

To me, it seems like a critical piece of information about the land transaction is missing. If they claim APIC was increased by $10 per share, than the stock must have been valued at $11 per share ($1 par + $10 increase to APIC). That means the land was valued at $143,000 ($11 per share * 13,000 shares). Based on the information you posted here, I'm not sure how they expected you to know that.

Your question about the 2,000 shares is easier to answer. Your journal entry for the purchase of treasury stock under the cost method is correct. On reissue of 2,000 of the 5,000 treasury shares, the journal entry is as follows:

Dr. Cash………………………32,000 (2,000 shares X $16/share)

Cr. Treasury Stock……………………..28,000 (2,000 X $14/share)

Cr. APIC……………………………………..4,000 (2,000 X $2/share)

Instead of netting the price you paid for the treasury stock ($14) against the price you received ($16) to calculate the increase to APIC, they took the long way and added the entire $32,000 and then backed out $28,000 to achieve the same effect of a $4,000 increase.

FAR - 91
AUD - 88
BEC - 86
REG - 79

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