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?
Debit cash $10,000, credit capital stock $10,000
Debit capital stock $100,000, credit cash $100,000
Debit cash $100,000, credit capital stock $100,000
Debit cash $100,000, credit treasury stock $100,000
r The Correct Answer and Explanation is:
When a company sells 10,000 shares of previously authorized stock at the par value of \$10 per share, it is engaging in a transaction that affects its equity structure.
Correct Answer:
The company would raise \$100,000 from the sale of these shares.
Explanation:
- Par Value:
The par value of a share is the nominal value assigned to the share in the company’s articles of incorporation. It is the minimum amount that can be sold for and is often a symbolic value. In this case, the par value is \$10 per share. - Sale of Shares:
The company is selling 10,000 shares at this par value. To calculate the total amount raised by this transaction, we multiply the number of shares sold by the par value of each share: $$
\text{Total Funds Raised} = 10,000 \text{ shares} \times 10 \text{ dollars/share} = 100,000 \text{ dollars}
$$ - Impact on Financial Statements:
- Balance Sheet: The sale will result in an increase in both the cash (asset) account and the stockholders’ equity section. The cash account increases by the amount raised from the sale, i.e., \$100,000. The equity section of the balance sheet will show an increase in common stock (under stockholders’ equity) for the par value of the shares issued, i.e., \$100,000.
- Stockholders’ Equity: The amount raised, \$100,000, will be recorded in the common stock account at the par value. If the company sells shares at a price higher than the par value (for example, \$15 per share), the difference between the sale price and the par value would be recorded as additional paid-in capital. However, in this case, since the shares are sold at par value, there is no additional paid-in capital.
- Previous Authorization:
The phrase “previously authorized stock” means that the company has already obtained permission to issue a certain number of shares in its articles of incorporation. This sale does not require additional authorization because the shares are already approved for issuance.
In conclusion, the company raises \$100,000 by selling 10,000 shares at the par value of \$10 per share. The transaction impacts the company’s balance sheet, increasing its cash and stockholders’ equity.