Chad Darrow, CFO of your company is considering constructing a deal with Extreme Industries, whereby stock is issued in exchange for an asset (custom extrusion equipment valued at $400,000 by an outside appraiser). The stock to be exchanged is a new

Question

class of preferred stock that has not yet been traded in the open market. He has asked that you draft a memo to Marc Lyon, CEO about the valuation of the asset to be used in the exchange. In your memo address the reporting amount for the asset and how fair market value could be determined.

Answer 1

INTERNAL MEMORANDUM
TO: Marc Lyon, CEO
FROM: Chad Darrow, CFO
I have determined that the best way to construct the deal with Extreme Industries is by issuing our stock in exchange for the custom extrusion equipment. The asset should be recorded at the fair market value of the consideration given (the stock) or the fair market value of the consideration received (the asset), whichever is more readily determinable. Fair market value may be determined by reference to sales of the stock on the stock exchange or, in some cases, by an appraisal of the asset. In this case, since the new class of preferred stock does not have a readily determinable market value, we will be recording the custom extrusion equipment at $400,000, which was the value determined by an independent appraiser.