The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to
A. Organizational Expenses
B. Goodwill
C. Common Stock
D. Cash
The correct answer and explanation is :
The correct answer is:
C. Common Stock
Explanation:
When a company issues common stock, it records the transaction by crediting the Common Stock account for the par value of the shares issued. In this case, the company issued 150 shares of common stock with a par value of $5 per share in exchange for legal services. The total par value of the issued stock is:
[
150 \text{ shares} \times 5 \text{ dollars per share} = 750 \text{ dollars}
]
This amount is recorded as a credit to the Common Stock account, which represents the ownership interest of shareholders.
Since the stock was issued in exchange for legal services rather than cash, the corresponding debit entry should be recorded under Organizational Expenses (or Legal Expense). Organizational expenses include costs incurred in forming a corporation, such as legal fees, state incorporation fees, and other start-up costs.
Journal Entry:
Debit: Organizational Expenses $750
Credit: Common Stock $750
Why Not the Other Options?
- A. Organizational Expenses (Incorrect as a credit) – While legal fees are an organizational expense, expenses are typically debited, not credited.
- B. Goodwill (Incorrect) – Goodwill is recorded when a company acquires another business for more than its fair value, which is not the case here.
- D. Cash (Incorrect) – No cash was involved in this transaction; instead, stock was issued in exchange for legal services.
Thus, the correct credit entry is to Common Stock to reflect the issuance of shares.