Multiple Choice
When a business issues common stock in exchange for assets or services, how should the transaction be recorded?
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12. Stockholders' Equity
Issuing Common Stock for Assets or Services
Multiple Choice
When a company sells 10,000 shares of previously authorized common stock for cash, how should the transaction be recorded?
A
Debit Common Stock and credit Cash for the total amount received.
B
Debit Retained Earnings and credit Common Stock for the par value of the shares.
C
Debit Cash and credit Common Stock for the total amount received.
D
Debit Cash and credit Retained Earnings for the total amount received.
Verified step by step guidance1
Step 1: Understand the nature of the transaction. The company is selling 10,000 shares of previously authorized common stock for cash. This means the company is issuing equity and receiving cash in exchange.
Step 2: Identify the accounts involved. The two accounts affected are 'Cash' (an asset account) and 'Common Stock' (an equity account). Cash increases because the company receives money, and Common Stock increases because the company is issuing shares.
Step 3: Determine the correct journal entry. When cash is received, it is debited (increased). When common stock is issued, it is credited (increased). The journal entry will involve debiting the Cash account and crediting the Common Stock account.
Step 4: Consider the total amount received. The total amount received will be recorded in the Cash account. If the shares have a par value, the par value portion is credited to the Common Stock account, and any excess over par value is credited to an additional equity account, such as 'Paid-in Capital in Excess of Par.'
Step 5: Record the transaction in the journal. The journal entry will look like this: Debit Cash for the total amount received, Credit Common Stock for the par value of the shares, and Credit Paid-in Capital in Excess of Par for the excess amount, if applicable.
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