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. Concurrently, it incurs $5,000 in direct costs related to the stock issuance. How should these stock issuance costs be recorded?
- AAs a reduction in Retained Earnings.
- BAs an increase in a deferred charge asset.
- CAs an expense on the income statement.
- DAs a reduction in Additional Paid-in Capital (APIC).
Show answer & explanationAnswer & explanation
Correct answer: D. As a reduction in Additional Paid-in Capital (APIC).
Direct costs associated with issuing stock, such as legal fees and underwriting costs, are treated as a reduction of the proceeds received from the issuance, specifically by reducing Additional Paid-in Capital.
Why the other options are wrong
- A. Retained Earnings are affected by net income and dividends, not stock issuance costs.
- B. Issuance costs are not deferred as assets; they are direct reductions of equity.
- C. Issuance costs are not expensed; they reduce the capital raised.
Stock Issuance Costs
Costs directly attributable to issuing new shares of stock, such as legal, accounting, and underwriting fees.
- Reduce the net proceeds received from the stock issuance.
- Debited to Additional Paid-in Capital (APIC).
- Do not appear as an expense on the income statement.
Memory trick: Shareholder's Cash, Costs Cut Capital