Concept explainers
Common stock: It shows the value of shareholders’ capital in the company. it means the amount invested by the owner of the company.
To identify: The correct option to record the transaction.
Answer:
'Option e is correct
Date | Account Title and Explanation | Post ref | Debit($) | Credit($) |
Cash | 48,000 | |||
Common Stock | 30,000 | |||
Paid in capital in excess of par value | 18,000 | |||
(Being shares issued at above face value ) |
Explanation of Solution
- Cash is an asset. Since, cash is received, it increases asset. Hence debit cash account
- Common stock is equity. Since, shares is issued, it increases equity. Hence, credit common stock account.
- Paid in capital in excess of par value is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value.
Option a:
Option a- is incorrect. As debit in paid in capital in excess of par value will reduce equity but in issue, equity increases.
Option b:
Option b-is incorrect. As 6,000 shares of $5 face value is issue. So, it will only increase common stock by $30,000.
Option c:
Option c- is incorrect. As paid in capital in excess of par value will only increase by $18,000 and not $30,000 because paid in capital in excess of par value is received for 6,000 shares of $3 each.
Option d:
Option d is incorrect. A credit to cash means reduction in asset but in issue, asset increases.
Thus, the correct option is e.
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Chapter 11 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
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