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A company issues 10,000 shares of $0.05 par value common stock for $25 per share. Which of the following is recorded at issuance?Multiple ChoiceCredit Common Stock for $500.Credit Additional Paid-In Capital for $500.Credit Additional Paid-In Capital for $250,000.Credit Common Stock for $250,000.

Question

A company issues 10,000 shares of 0.05parvaluecommonstockfor0.05 par value common stock for 25 per share. Which of the following is recorded at issuance?Multiple ChoiceCredit Common Stock for 500.CreditAdditionalPaid−InCapitalfor500.Credit Additional Paid-In Capital for 500.Credit Additional Paid-In Capital for 250,000.CreditCommonStockfor250,000.Credit Common Stock for 250,000.

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Solution

The correct answer is:

Credit Common Stock for 500.CreditAdditionalPaid−InCapitalfor500. Credit Additional Paid-In Capital for 249,500.

Here's the step-by-step explanation:

  1. Par value is the nominal value of each share as stated in the company's charter. In this case, it's 0.05pershare.So,for10,000shares,thetotalparvalueis10,000shares∗0.05 per share. So, for 10,000 shares, the total par value is 10,000 shares * 0.05/share = $500. This amount is credited to the Common Stock account.

  2. The company sold each share for 25,whichiswayabovetheparvalue.TheexcessamountiscreditedtotheAdditionalPaid−InCapitalaccount.Tocalculatethis,first,findthetotalamountreceivedbythecompany,whichis10,000shares∗25, which is way above the par value. The excess amount is credited to the Additional Paid-In Capital account. To calculate this, first, find the total amount received by the company, which is 10,000 shares * 25/share = 250,000.Thensubtracttheparvalue(250,000. Then subtract the par value (500) from this amount. So, 250,000−250,000 - 500 = $249,500. This is the amount credited to the Additional Paid-In Capital account.

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