Many entrepreneurs choose to incorporate their businesses. Incorporating allows the entrepreneur to sell shares of stock when he needs additional financing. Incorporating also protects the entrepreneur from liability when others make a claim against the company. These claims cannot be pursued against the individual or his personal assets. The business issues shares of common stock in exchange for money or assets. When the company receives land in exchange for common stock, it needs to record this transaction in its accounting records.
Before the company's accountant records the transaction, she needs to determine what dollar value to use. She considers both the fair market value of the land and the value of the common stock. The value, which can be determined more easily and verified, provides the basis for journal entry. After determining the dollar value to use, the accountant creates the journal entry. She debits Land for the determined value of the transaction. She credits Common Stock for the par value of the stock and Paid in Capital for the difference.
Common Stock Value
The accountant determines the fair market value of common stock in other ways. If the company sells stock on a stock exchange, the accountant can use the price listed on the stock exchange. If the company recently sold shares of stock to other investors, the accountant can review the price for which those shares sold.
Land Market Value
The accountant determines the fair market value of land in a couple of different ways. She might review the property tax records to find the assessed value of the land. However, this value may not fairly represent the land value. She might review the price the investor paid. However, this value may represent historical cost rather than the current value. Alternatively, she might request an appraisal be performed on the land.
The accountant reports the results of this transaction on the balance sheet. The assets on the balance sheet include current assets, fixed assets and other noncurrent assets. Land represents an asset and appears on the balance sheet with other noncurrent assets. Common Stock and Paid in Capital both represent equity accounts. These accounts appear in the Stockholder Equity section in the balance sheet.