The entry to record the issuance of common stock at a price above par includes a debit to
A. Organizational Expenses
B. Common Stock
C. Cash
D. Paid-In Capital in Excess of Par-Common Stock
The correct answer and explanation is :
The correct answer is:
C. Cash
Explanation:
When a company issues common stock at a price above its par value, the accounting entry includes:
- A debit to Cash: The company receives cash from investors, so it increases the Cash account (an asset).
- A credit to Common Stock: The par value of the stock is recorded in the Common Stock account.
- A credit to Paid-In Capital in Excess of Par-Common Stock: The amount received above the par value is recorded in this account, which represents additional paid-in capital.
Journal Entry Example:
Suppose a company issues 1,000 shares of common stock with a par value of $1 per share but sells them for $5 per share. The total cash received is:
[
1,000 \times 5 = 5,000
]
The accounting entry would be:
- Debit Cash: $5,000 (increases assets)
- Credit Common Stock: $1,000 (1,000 shares × $1 par value)
- Credit Paid-In Capital in Excess of Par – Common Stock: $4,000 (the additional amount above par)
Why Other Options Are Incorrect:
- A. Organizational Expenses: These are costs related to forming a corporation and are recorded separately as an expense.
- B. Common Stock: This account is credited only for the par value of issued shares, not the entire amount received.
- D. Paid-In Capital in Excess of Par-Common Stock: While this account is credited in the entry, it is not debited.
Thus, the correct entry requires debiting Cash for the amount received.