Stockholders' Equity (3)

DONATED CAPITAL is a gift of assets to a company, usually by state or local governments, typically to induce a business to relocate to their jurisdiction. Donated Capital belongs to the Common Stockholders, unless otherwise stated in stockholders' agreements.

When calculating part g, you will use the CALL price of preferred stock. If there is no call price, then you will use the par value. But when preferred stock has a call price, that is the amount used, because it is the amount that would be paid to preferred stockholders if the corporation were to call and retire the preferred stock. Aside from this one small point, this problem is essentially the same as the example I provided in the Study Guide for this week.

Non-Cash Stock Transactions
Stock must be paid for before it can be issued. It is a violation of law to issue or record stock prior to receiving payment from investors. It's easy to value a stock sale for cash, since the cash paid fixes the actual value of the transaction.

Sometimes stock is issued for something other than cash. Land, buildings, equipment, vehicles or other assets can be exchanged for stock. Shares of one company's stock can also be exchanged for shares of another company. Investments of various types (stocks, bonds, etc.) may also be exchanged for shares of stock. In some cases, the value of the property given up can easily be determined, making it easy to place a value on the stock transaction.

When a non-cash transaction occurs, we have to take a market value approach, and we try to identify the part of the transaction that has the most widely accepted market value. There is a specific heirarchy accountants must use to determine the overall value of such transactions. We apply the heirarchy in the following order.

1. If the stock being issued is publicly traded, the entire transaction is the market value of the stock given up. We will assign that value to any assets received.

Example: On March 27, 2006 Microsoft Corp. exchanges 100,000 shares of company stock for a piece of undeveloped real estate. What is the value of this transaction?

On March 27, 2006 Microsoft stock sells for $27.25 per share. They give up 100,000 shares, in effect saying "we think the property we are purchasing is worth $2,725,000."
[$27.25 * 100,000 shares = $2,725,000]

We assign the market price of Microsoft stock to this transaction, because the stock is heavily traded on global stock markets, and the price is fixed by a very large market of investors. If Microsoft feels that the real estate is worth 100,000 shares, who are we to argue? Accountants just have to record the transaction.We don't have to care if company management is making a good deal or not. But we do assume that the transaction is "fair" and "at arms length" and that neither party is under any particular pressure or duress to enter into this fair market value agreement.

On the other side of the coin -- the seller (now stockholder) must also feel that $2,725,000 is a "fair" price for his/her real estate, or he/she would not have accepted Microsoft's offer. Since the 100,000 shares can immediately be sold on open market for $2,725,000, the seller can convert the shares to cash the same day as the transaction.

Microsoft common stock is $0.00000625 par value per share, so they will record $0.63 in par value, with the remaining recorded as additional paid-in capital, as follows:
[$0.00000625 x 100,000 = $ 0.625, rounded to $ 0.63]

General Journal

Date	Account	Debit	Credit
	Real Estate	2,725,000.00
	Common Stock		.63
	Additional Paid-in Capital		2,724,999.37
	To record the issue of 100,000 shares common stock in exchange for unimproved real estate.

This is a rather unusual example because Microsoft's par value is so low. But this is how it's done, regardless of the dollar amounts involved.

2. If the stock being issued is NOT publicly traded, the entire transaction is the market value of the asset received. We will assign that value to any shares of stock issued.

XYZ Corporation is a small private company. It's stock is not sold on a public stock exchange, and there is no ready market for the company's stock at this time. XYZ Corporation agrees to exchange 10,000 shares of company stock for a piece of unimproved real estate. Two independent, certified and licensed appraisers are hired to provide appraisals of the real estate value. The appraisers agree that the real estate has a fair market value in the range of $100,000 to $110,000 at the time of the transaction.

Following the accounting rule of conservatism, we apply the lower of the range of values, or $100,000, to this transaction. We follow the conservatism rule to minimize the effect of making an estimate. If the company stock has a par value of $1 we would record the transaction as follows:

General Journal

Date	Account	Debit	Credit
	Real Estate	100,000
	Common Stock		10,000
	Additional Paid-in Capital		90,000
	To record the issue of 10,000 shares $1 par common stock in exchange for unimproved real estate.

3. In some rare instances neither of the two approaces above will work, and we have to take a slightly different approach. We still need to approximate true market value of the transaction, since that is always considered the fair approach.

Assume ABC Corporation is not publicly traded. They agree to exchange 5,000 shares of company stock for a piece of unimproved real estate. The real estate is in an area that is facing economic downturn in the real estate market, and has been available for sale for many years, with no interested buyers or offers. Appraisers are reluctant to place a market value on the property.

After updating and analyzing the company's books, the accountants determine that ABC Corporation's stock has a Book Value of $2.10 per share. We seldom use book value for any calculation, but this is one rare instance where it is used. We place a value on the transaction of $10,500 [5000 shares * $2.10]. IF the par value is $1 per share, we record the transaction as follows.

General Journal

Date	Account	Debit	Credit
	Real Estate	10,500
	Common Stock		5,000
	Additional Paid-in Capital		5,500
	To record the issue of 5,000 shares $1 par common stock in exchange for unimproved real estate.

In this case, the corporation is willing to give a share in the company equal to $10,500 in exchange for the real estate. This represents a future interest in profits and ownership to the person selling the property. The new stockholder believes the value of the land is worth $10,500 since he/she accepts the offer under these terms. Both parties will apply the same value to the transaction.