CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsEasy
A company issues 1,000 shares of $10 par value common stock for $50 per share. The journal entry to record this transaction would include a credit to Common Stock for:
- A$40,000
- B$10,000
- C$0
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: B. $10,000
When common stock is issued, the Common Stock account is credited for the par value of the shares issued. The excess amount received over par value is credited to Additional Paid-in Capital.
Why the other options are wrong
- A. This represents the Additional Paid-in Capital ($50,000 - $10,000).
- C. This is incorrect; common stock is always credited for its par value upon issuance.
- D. This represents the total cash received, not just the par value of the common stock.
Issuance of Common Stock
The issuance of common stock involves recording the par value in the Common Stock account and any amount received above par in Additional Paid-in Capital.
- Common Stock is credited at par value.
- Additional Paid-in Capital (or Paid-in Capital in Excess of Par) is credited for the amount received above par.
- Cash is debited for the total consideration received.
Memory trick: Equity is the OWNERS' slice, showing their INVESTMENT and the company's EARNINGS.