Concept explainers
Issuing Common Stock
Carmean Products Inc. sold 32,350 shares of common stock to stockholders at the time of its incorporation. Carmean received S42 per share for the stock.
Required:
- Assume that the stock has a $22 par value per share. Prepare the
journal entry to record the sale and issue of the stock. - Assume that the stock has a $8 stated value per share. Prepare the journal entry to record the sale and issue of the stock.
- Assume that the stock has no par value and no stated value. Prepare the journal entry to record the sale and issue of the stock.
- CONCEPTUAL CONNECTION How do the different par values affect total contributed capital and total stockholders’ equity?
(a)
Introduction:
A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay the dividend periodically. Common stock is also referred to as common shares.
To record:
Journal entry for the issue of stock with $22 as par value.
Answer to Problem 60E
Journal Entry for issuance common stock
Date | Particulars | Debit ($) | Credit ($) |
Not given |
Cash Dr. Common Stock Additional Paid-in Capital (common stock) |
1,358,700 | 711,700 647,000 |
Explanation of Solution
Given:
32,350 shares of common stock issued at $42 (par value $22).
When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.
Journal Entry for issuance common stock
Date | Particulars | Debit ($) | Credit ($) |
Not given |
Cash Dr. Common Stock Additional Paid-in Capital (common stock) |
1,358,700 | 711,700 647,000 |
Cash =
Cash =
Cash = $1,358,700
Common Stock =
Common Stock =
Common Stock = $711,700
Additional Paid-in Capital (common stock) =
Additional Paid-in Capital (common stock) =
Additional Paid-in Capital (common stock) = $647,000.
(b)
Introduction:
A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.
To record:
Journal entry for the issue of stock with $8 as stated value.
Answer to Problem 60E
Journal Entry for issuance common stock
Date | Particulars | Debit ($) | Credit ($) |
Not given |
Cash Dr. Common Stock Additional Paid-in Capital (common stock) |
1,358,700 | 258,800 1,099,900 |
Explanation of Solution
Given:
32,350 shares of common stock issued at $42 (stated value $8).
When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.
Journal Entry for issuance common stock
Date | Particulars | Debit ($) | Credit ($) |
Not given |
Cash Dr. Common Stock Additional Paid-in Capital (common stock) |
1,358,700 | 258,800 1,099,900 |
Cash =
Cash =
Cash = $1,358,700
Common Stock =
Common Stock =
Common Stock = $258,800
Additional Paid-in Capital (common stock) =
Additional Paid-in Capital (common stock) =
Additional Paid-in Capital (common stock) = $1,099,900.
(c)
Introduction:
A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.
The interest expense to be shown in Income Statement for year 2023.
Answer to Problem 60E
Journal Entry for issuance common stock
Date | Particulars | Debit ($) | Credit ($) |
Not given |
Cash Dr. Common Stock |
1,358,700 | 1,358,700 |
Explanation of Solution
Given:
32,350 shares of common stock issued (no par value or stated value).
When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.
Journal Entry for issuance common stock
Date | Particulars | Debit ($) | Credit ($) |
Not given |
Cash Dr. Common Stock |
1,358,700 | 1,358,700 |
Cash =
Cash =
Cash = $1,358,700
Common Stock =
Common Stock =
Common Stock = $1,358,700.
(d)
Introduction:
A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.
To explain:
The effect of par value on capital contributed and total stockholders’ equity.
Answer to Problem 60E
The total capital contributed and total shareholders’ equity remains unchanged if there is change in the par value of shares issued.
Explanation of Solution
The effect of Par value on:
- Contributed Capital: The contributed capital is divided into two accounts, i.e., Common Stock and Additional Paid-in (common stock). Par value is the minimum value for which a company can issue its common stock.
- Total Stockholders’ Equity: Total Shareholders’ equity includes various components. Some of the are:
- Common Stock
- Additional Paid-in (common stock)
- Preferred Stock
- Additional Paid-in (Preferred stock)
- Retained Earnings
Change in par value doesn’t affect the contributed capital as a whole. It affects the common stock account which is the amount that received for issuing stock at par value; the additional amount is recorded in the Additional Paid-in (common stock).
Hence, it can be concluded that larger the par value, smaller will be the additional paid-in capital.
Change in par value doesn’t affect total shareholders’ equity as a whole.
For instance, the issue price of a common stock is $25 (wherein $10 is par value and 20 shares have been issued).
This means,
Common Stock =
Additional Paid-in (common stock) =
Total Stockholders’ Equity = Common Stock + Additional Paid-in (common stock)
Total Stockholders’ Equity = $200 + $300
Total Stockholders’ Equity = $500
Now, the issue price increased to $20. This means,
Common Stock =
Additional Paid-in (common stock) =
Total Stockholders’ Equity = Common Stock + Additional Paid-in (common stock)
Total Stockholders’ Equity = $400 + $100
Total Stockholders’ Equity = $500
Hence, the total shareholders’ equity remains unchanged.
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Chapter 10 Solutions
Cornerstones of Financial Accounting
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