Accounting Questions

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satyaa

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Q1. When a firm issues its par value common stock in payment for goods or services, the least appropriate basis to measure and record the transaction is:
A) fair value of the goods or services.
B) par value of the shares issued.
C) market quote of the stock on a national exchange.
D) appraisal of the goods or services as determined by an �outsider.�


Q2. A corporation reacquires shares of its stock and accounts for them under the cost method. What effect will this transaction have on working capital and total equity?
A) Unchanged working capital; unchanged total equity.
B) Decreased working capital; unchanged total equity.
C) Unchanged working capital; decreased total equity.
D) Decreased working capital; decreased total equity.

Thanks for your help
 
For Q1, B would be correct.



For Q2, D. as Cash decreases and equity decreases
 
Thanks for the reply. I was not sure about the first one (though I had selected B). And I was able to get the logic as to why D is the right answer for Q2.

Thanks for your help
 
Can you explain both...I'd like to hear someone else's reasoning? I got #2, but had no idea for #1.

Thanks

Keep the questions coming Satyaa
 
Par value of a stock has basically no meaning. A company can set par value at whatever they want. I've seen many companies set it at $.01. That's not an appropriate value to use when computing the value of a transaction.
 
Number 2 would mean that the company would pay cash (Asset Credit) and reduce equity (Equity Debit).

For Number 1, goods need to be accounted for at historical cost, plus any adjustments (i.e. installation costs, shipping and handling, sales commision, etc). So Par value of the transaction would be inappropriate for accounting for the purchase price of the machine. Assuming the purchase of a machine for equity. The transaction would be detailed something to the effect of:

A) adjusting the plant and equipment for 100,000 dollars (historical cost) (Asset +) and

B) then adjusting the common shares account by the historical cost of capital and the rest from paid in capital (Equity - / -).
 
par value is the legal capital that can't be distributed through a liquidating dividend, not in light of such sophisticated bond coveneants its set low as creditors etc....have other routes to the cookie jar in case of trouble.
 
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