Perry Park company (a privately held company) was searching for a way to expand

Question

Perry Park company (a privately held company) was searching for a way to expand its operating capacity even though it was short of cash. Peter, the president of the company, was playing golf and mentioned his concern to his playing partner who owned some land and a building and was interested in disposing of them. After some negotiation, the two agree to swap the land and building for shares in the company. Peter has asked you how to account for this transaction, including whether the transaction qualifies as an exception to the general rule to use fair value and the value to place on the transaction and its compontents. Research the generally accepted accounting principles and prepare a short memo to the president. Does the situation create a ethical issue?

Explanation / Answer

Answer:

Issue of shares for consideration other than cash is allowed and it takes form of two transactions;

1. Purchase of asset

Dr. Asset or Sundry Assets A/c

Cr. Vendor A/c

(at the agreed value of assets)

2. Issue of shares

Dr. Vendor A/c

Cr. Share Capital

(credit to share capital will based on issue at par or premium or discount)

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