Candy Corp: Recording of Asset in Exchange for Stock
Candy Corp purchased $175,000 worth of equipment in 2008 for $100,000 cash and a promise to deliver an indeterminate number of treasury shares of its $ XX.00 par common stock, with a market value of $25,000 on January 1 of each year for the next 4 years. Hence $100,000 in "market value" of treasury shares will be required to discharge the $75,000 balance due on the equipment.
Candy Corp then acquired 5,000 shares of its own stock in the expectation that the market value of the stock would increase substantially before the delivery dates.
A. Discuss the appropriateness of recording the equipment at:
(1) $100,000 (the cash payment).
(2) $175,000 (the cash price of the equipment).
(3) $200,000 (the $100,000 cash payment plus the $100,000 market value of treasury stock that must be transferred to the vendor in order to settle the obligation according to the terms of the agreement).
B. Discuss the arguments for treating the balance due as:
(1) A liability.
(2) Treasury stock subscribed.