When common stock is issued by a corporation for a cash price above par value,the excess of the cash proceeds over the par value should be reported in the financial statements as a component of
A)retained earnings on the balance sheet.
B)total liabilities on the balance sheet.
C)operating income on the income statement.
D)total contributed capital on the balance sheet.

Question

Quizplus · Accepted Answer

When common stock is issued for a cash price above its par value, the excess amount is referred to as additional paid-in capital. It represents the amount effectively paid by the shareholders for the shares, above and beyond the nominal value assigned to the shares by the company. Therefore, it should be reported as a component of total contributed capital on the balance sheet. Option A is incorrect because retained earnings refer to the cumulative earnings of the company that have not been distributed to stockholders as dividends. Option B is incorrect because the excess paid-in capital does not represent a liability for the company. Option C is incorrect because operating income refers to the income generated by the company's core operations and does not account for changes in the capital structure of the company.

When Common Stock Is Issued by a Corporation for a Cash