Which of the following is true for a corporation that issues 1,000 shares of $2 par common stock at $5 per share?

Question

Quizplus · Accepted Answer

A: The correct answer is a. The common stock account will increase by $5,000.
Here's why:
When a corporation issues shares, it records the transaction by increasing the common stock account by the par value of the shares issued and the additional paid-in capital (or capital in excess of par) by the amount received over the par value.
In this case, the corporation is issuing 1,000 shares with a par value of $2 per share at a price of $5 per share. The accounting entries would be as follows:
- The common stock account is credited by the par value of the shares issued, which is 1,000 shares x $2 par value = $2,000.
- The additional paid-in capital account (or capital in excess of par) is credited by the amount received over the par value, which is (1,000 shares x $5) - (1,000 shares x $2) = $5,000 - $2,000 = $3,000.
The total amount received from the issuance is 1,000 shares x $5 = $5,000. This is the amount by which the stockholders' equity increases, but it is split between the common stock account ($2,000) and additional paid-in capital ($3,000).
The other options are incorrect for the following reasons:
b. $2 per share is not the maximum selling price for these shares of stock. It is the par value, and the shares can be sold at any price above the par value that the market is willing to pay.
c. While the total stockholders' equity does increase by $5,000, this increase is not solely in the common stock account but is divided between the common stock account and additional paid-in capital as explained above.
d. The per share dividend amount on these shares is not determined by the par value. Dividends are declared by the board of directors and can vary in amount. The par value does not dictate the dividend amount.

Which of the Following Is True for a Corporation That