A company sells 10,000 shares of previously authorized stock at the par value of $10 per share. What’s the correct entry to record the transaction?
The Correct Answer and Explanation is:
To record the sale of 10,000 shares of previously authorized stock at a par value of $10 per share, the correct journal entry is as follows:
Journal Entry:
Debit: Cash $100,000
Credit: Common Stock $100,000Explanation:
When a company sells shares of its stock, it is essentially raising capital, which is reflected in its financial statements. In this scenario, the company is selling 10,000 shares at a par value of $10 per share. The par value is the nominal or face value assigned to the stock and is significant because it represents the minimum price at which shares can be issued.
- Calculation of Cash Received: The total cash received from this transaction can be calculated by multiplying the number of shares sold by the par value per share:
[
\text{Total Cash} = 10,000 \text{ shares} \times \$10/\text{share} = \$100,000.
]
This amount reflects the total cash inflow to the company, which increases its assets. - Recording the Cash Inflow: In the journal entry, the company debits the Cash account by $100,000. This debit signifies that the company’s cash assets have increased due to the inflow from the sale of stock.
- Issuance of Common Stock: The company also credits the Common Stock account by $100,000. This entry reflects the issuance of shares and signifies the ownership stake provided to the shareholders in exchange for their investment.
It’s important to note that the par value of stock does not necessarily reflect its market value. In many cases, stocks are sold at a premium (above par value), but in this example, the sale occurs at par value. Therefore, there is no additional entry required for paid-in capital over par.
In summary, the transaction indicates the company’s effective utilization of its authorized stock to raise capital while enhancing its cash reserves and equity base in the balance sheet.