Chapter 10, Problem 1QC

To determine

To identify: The appropriate debit/credit entry for the issuance of common stock from the given options.

Answer to Problem 1QC

c. credit to common stock for $30,000

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.

Par value: It refers to the value of a stock that is stated by the corporation’s charter. It is also known as face value of a stock.

Journal entry to record the issuance of common stock would be:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
	Cash (1)	330,000
	Common Stock (2)		30,000
	Paid-in Capital in Excess of Par value –Common stock (3)		300,000
	(To record issuance stock for cash)

Table (1)

Working note:

Compute the amount of cash received.

$\begin{array}{c}\text{Cash received = Number of shares}\times \text{Market value of common stock}\\ \text{= 30,000 shares × \$11}\\ \text{= \$330,000}\end{array}$ (1)

Compute common stock value.

$\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{= Number of shares}\times \text{Par value of common stock}\\ \text{= 30,000 shares × \$1}\\ \text{= \$30,000}\end{array}$ (2)

Compute paid-in capital in excess of par-common value.

$\begin{array}{c}\begin{array}{l}\text{Paid-in capital in excess }\\ \text{of par-common value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash }-\\ \text{Common stock value }\end{array}\right)\\ \text{= \$330,000 – \$30,000}\\ \text{= \$300,000}\end{array}$ (3)

• Cash is an asset account. The amount has increased because cash is received by issuing shares; therefore, debit Cash account with $330,000.
• Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $30,000.
• Paid–in Capital in Excess of Par–Common is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid–in Capital in Excess of Par–Common account with $330,000.

Option a:

“Option a” is not correct, because issuance of stock debits cash account but not common stock account.

Option b:

“Option b” is not correct, because credit amount of paid-in capital in excess of par must be $300,000 but not $330,000.

Option c:

“Option c” is correct, issuance of common stock credits common stock account for $30,000.

Option d:

“Option d” is not correct, because option a is not correct, even if option b is correct.