Suppose a corporation issues 5,000 shares of $1 par common stock for $30 per share. In addition to the increase in cash, what effect does this transaction have on the accounting equation?

Question

Quizplus · Accepted Answer

Assets = Liabilities + Shareholders' Equity
In this case, the corporation is issuing 5,000 shares of $1 par common stock for $30 per share. The par value of the stock is the face value of the stock as stated in the corporate charter, and it is the minimum amount that the shares can be issued for. The amount received over the par value is considered additional paid-in capital.
Here's the breakdown of the transaction:
- The corporation receives $30 per share for 5,000 shares, which equals $150,000 in cash. This increases the Assets side of the equation.
- The Common Stock account is credited for the par value of the shares issued, which is 5,000 shares times the $1 par value, equaling $5,000. This increases the Shareholders' Equity side of the equation.
- The additional amount received over the par value is credited to the Paid-in Capital in Excess of Par account (also known as Additional Paid-in Capital). This is calculated as (Issue Price - Par Value) x Number of Shares, or ($30 - $1) x 5,000, which equals $145,000. This also increases the Shareholders' Equity side of the equation.
So, the correct answer to the question is:
b. Paid-in capital in excess of par increases $145,000.
This is because the transaction increases the cash (an asset) by $150,000, increases the Common Stock (a component of shareholders' equity) by $5,000, and increases the Paid-in Capital in Excess of Par (another component of shareholders' equity) by $145,000. There is no effect on retained earnings or any gain on stock issuance recorded in this transaction.

Suppose a Corporation Issues 5,000 Shares of $1 Par Common