In the rare instance when a par value stock is issued at a cash price below par,the excess of the par value over the amount of cash received should be
A)credited to a liability account.
B)debited to the Retained Earnings account.
C)debited to an account titled Discount on Capital Stock.
D)credited to the Retained Earnings account.

Question

Quizplus · Accepted Answer

When a par value stock is issued at a cash price below par, the excess of the par value over the amount of cash received is termed as a "discount on capital stock". This should be debited to "Discount on Capital Stock" account, which is a contra-equity account and should be deducted from the par value of the stock. It represents a reduction in the total amount of equity, and is not a liability. Therefore, option A is incorrect. Option B is incorrect because the Retained Earnings account is not affected when stock is issued at a discount. Option D is incorrect because the Retained Earnings account is not credited when stock is issued.

In the Rare Instance When a Par Value Stock Is