Issuance of Shares for Non-Cash Items

Corporations usually issue shares in exchange of cash or cash equivalents since cash can be used to purchase other assets or services. However shares may be issued in exchange of non-cash assets or services if the company actually needs them. For example shares may be issued to the supplier of machinery as purchase price and to attorneys as legal fee.

Generally such transactions of share issuance are recorded at the fair market value of the shares or the non-cash assets/services which ever can be determined more reliably. The determination of fair market value is the right of the board of directors of the company and they may obtain services of professional appraisers for to determine the fair market value.

Example

A company issued 1,000 shares of common stock of $10 par value to its attorney as a consideration for legal services received by the company. The total fair market value of the shares, which was $10,200 at the time of issuance of shares, is to be used as the basis for valuation of the legal services.

Pass a journal entry to record the issuance of shares for non-cash consideration.

Journal Entry

Legal Expense10,200
Common Stock10,000
Additional Paid-In Capital200

by Irfanullah Jan, ACCA and last modified on

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