Reference no: EM132885485

Problem - CREATIVE AND CRITICAL THINKING - Exchange of Assets - You have been hired to examine Brahe Corporation's financial statements for the year ending December 31, 2019. Brahe was organized in January 2019 by Moses and Price, the original owners of options to acquire oil leases on 5,000 acres of land for $350,000. They expected that first the oil leases would be acquired by the corporation and subsequently 180,000 shares of the corporation's common stock would be sold to the public at $6 per share. In February 2019, they exchanged their options, $150,000 cash, and $50,000 of other assets for 75,000 shares of common stock of the corporation. Brahe's board of directors appraised the leases at $600,000, basing the appraisal on the price of other acreage recently leased in the same area. The options were therefore recorded at $250,000($600,000 2 $350,000 option price).

The options were exercised by the corporation in March 2019, prior to the sale of common stock to the public in April 2019. Leases on approximately 500 acres of land were abandoned as worthless during the year.

Required - Explain why the valuation of assets acquired by a corporation in exchange for its own common stock is sometimes difficult.