Principles of Financial Accounting: Stockholders' Equity - Stock Issued for Non-Cash, Assets

What It Is

Stock issued for non-cash assets is a transaction where a company exchanges shares of its own stock for assets other than cash. This can include inventory, property, equipment, or even services. For example, if a company buys $10,000 of inventory from a supplier and agrees to issue 1,000 shares of its own stock as payment, this is a stock issued for non-cash asset transaction.

Key Concepts & Formulas

• Fair Value: The market value of the stock issued, which is used to determine the gain or loss on the transaction. Example: If the market value of the stock is $10 per share, the fair value of 1,000 shares is $10,000.
• Cost of Goods Sold (COGS): The direct cost of producing or purchasing inventory, which is affected by the stock issued for non-cash asset transaction. Formula: COGS = Beginning Inventory + Purchases - Ending Inventory.
• Gross Profit: The difference between sales revenue and COGS, which is affected by the stock issued for non-cash asset transaction. Formula: Gross Profit = Sales - COGS.
• Debit/Credit Rule: When a company issues stock for non-cash assets, it debits the asset account (e.g., Inventory) and credits the stock issued account (e.g., Common Stock).
• Journal Entry: The entry to record the stock issued for non-cash asset transaction, which includes debiting the asset account and crediting the stock issued account.
• Gain or Loss: The difference between the fair value of the stock issued and the cost of the non-cash asset, which is recorded as a gain or loss on the income statement.
• Equity Method: A method of accounting for investments in other companies, which is used when a company issues stock for non-cash assets.

Journal Entry Examples

1. Dr. Inventory $10,000 Cr. Common Stock $10,000 Explanation: The company debits the inventory account to record the cost of the inventory and credits the common stock account to record the issuance of stock.

2. Dr. Property $20,000 Cr. Common Stock $20,000 Explanation: The company debits the property account to record the cost of the property and credits the common stock account to record the issuance of stock.

Common Mistakes

• Mistake: Confusing debits and credits for expense accounts.
• Correction: Remember that debits increase assets and expenses, while credits increase liabilities and equity.
• Mistake: Failing to record the gain or loss on the transaction.
• Correction: Record the gain or loss as a separate account on the income statement.
• Mistake: Not using the equity method for investments in other companies.
• Correction: Use the equity method when a company issues stock for non-cash assets and has a significant influence over the investee company.

Exam Tips

• Tip: When a company issues stock for non-cash assets, it is a non-cash transaction, so do not forget to record the gain or loss on the income statement.
• Tip: Use the equity method when a company issues stock for non-cash assets and has a significant influence over the investee company.
• Tip: Remember that debits increase assets and expenses, while credits increase liabilities and equity.

Quick Practice

1. A company issues 500 shares of its own stock for $5,000 of inventory. What is the journal entry to record this transaction? Answer: Dr. Inventory $5,000, Cr. Common Stock $5,000 Explanation: The company debits the inventory account to record the cost of the inventory and credits the common stock account to record the issuance of stock.

2. A company issues 1,000 shares of its own stock for $20,000 of property. What is the journal entry to record this transaction? Answer: Dr. Property $20,000, Cr. Common Stock $20,000 Explanation: The company debits the property account to record the cost of the property and credits the common stock account to record the issuance of stock.

3. A company issues 1,000 shares of its own stock for $10,000 of services. What is the journal entry to record this transaction? Answer: Dr. Services $10,000, Cr. Common Stock $10,000 Explanation: The company debits the services account to record the cost of the services and credits the common stock account to record the issuance of stock.

Last-Minute Cram Sheet

1. Stock issued for non-cash assets is a non-cash transaction.
2. Fair value is used to determine the gain or loss on the transaction.
3. Debits increase assets and expenses, while credits increase liabilities and equity.
4. The equity method is used when a company issues stock for non-cash assets and has a significant influence over the investee company.
5. Gain or loss is recorded as a separate account on the income statement.
6. COGS is affected by the stock issued for non-cash asset transaction.
7. Gross profit is affected by the stock issued for non-cash asset transaction.
8. Dividends are NOT an expense – they go directly to retained earnings.
9. Stock issued for non-cash assets is recorded at fair value, not at cost.
10. The equity method is used for investments in other companies, not for stock issued for non-cash assets.