C Corporation exchanged 20,000 shares of its nonconvertible preferred shares for land owned by B Corporation. A competing buyer previously had offered $150,000 cash for the land. Because of tax consequences, the cash offer was not accepted and the lot was exchanged for the shares. C Corporation previously had sold only 100 shares of its preferred shares at $9 per share several months ago. Based on the cost principle, at what amount should the land be reported on C's financial statements?

Question

Quizplus · Accepted Answer

The land should be reported at its fair market value, which is $150,000, as indicated by the cash offer from the competing buyer. The cost principle requires that assets be recorded at the cost to acquire them, and in the absence of a cash transaction, the fair market value of what was given up (or received if more clearly determinable) is used. In this case, the cash offer provides the best evidence of the land's fair market value.

C Corporation Exchanged 20,000 Shares of Its Nonconvertible Preferred Shares