Lanthier's Heating & Air
This company began business on June 1, 2019. The articles of incorporation authorize issuance of 10,000 shares of $2 par common stock and 5,000 shares of $8 par 6% cumulative preferred stock.
-Refer to Lanthier's Heating & Air. On June 5, 2019, the company issued 2,400 shares of common stock for $20 per share. What effect does the entry to record the stock issuance have on total stockholders' equity?

Question

Quizplus · Accepted Answer

The entry to record the issuance of common stock would affect the company's stockholders' equity by increasing it. When a company issues stock, it receives cash (or other assets) in exchange for the shares of the stock, which increases the equity of the company.
To calculate the effect on stockholders' equity, we need to determine the amount of cash received from the issuance of the common stock and the par value of the stock issued.
The company issued 2,400 shares of common stock at $20 per share. Therefore, the cash received from the issuance is:
2,400 shares * $20/share = $48,000
The par value of the stock does not affect the calculation of the increase in stockholders' equity in this case, because we are interested in the total amount received from the issuance, not just the par value portion. The par value is relevant for the accounting entries as it will be recorded in the common stock account (at par value) and the additional paid-in capital account (for the amount above par value).
The journal entry to record the issuance would be:
Debit: Cash $48,000
Credit: Common Stock (2,400 shares * $2 par value) $4,800
Credit: Additional Paid-In Capital ($48,000 - $4,800) $43,200
This entry shows that the cash account increases by $48,000, which is the proceeds from the stock issuance. The common stock account is credited for the par value of the shares issued ($4,800), and the additional paid-in capital is credited for the excess of the proceeds over the par value ($43,200).
The total increase in stockholders' equity is the amount of cash received, which is $48,000.
Therefore, the correct answer is:
c. increase of $48,000