INTERMIDIATE ACCOUNTING CHAPTER 3

Stock Issue Consideration

 Issuance of Stock:
- Corporation can issue common stock directly to investors (Closely Held) or indirectly
through investment firm (Publicly Held).
 Factors in setting price for a new issue of stock:
1. The company’s anticipated future earnings.
2. Its expected dividend rate per share.
3. Its current financial position.
4. The current state of the economy.
5. The current state of the securities market.
 Market value of Stock:
1- Stock of publicly held traded on organized exchange.
2- Interaction between buyer and seller determine the price per share.
3- Price set by the market place tends to the company’s earnings and dividends.
 Par and No Par Value Stock:
 Years ago, par value determined the legal capital per share that a company must
retain in the business for the protection of corporate creditors.
 Today many states do not require a par value.
 No par value stock is quite common today.
 In many states the board of directors assigns a stated value to no par shares.
 Corporate Capital:
Comparison of the owners' equity (stockholders ‘equity) accounts reported on a
balance sheet for a proprietorship, a partnership, and a corporation.
Proprietorship Partnership Corporation
Able, Capital Able, Capital Common Stock
Normal bat. Normal bal. Normal bal.

Baker, Capital Retained Earnings

Normal bal. Normal bal.

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INTERMIDIATE ACCOUNTING CHAPTER 3

 Issuing par value common stock for cash:

- Assume that Hydro-Slide, Inc. issue 1,000 share of 1$ Par-Value of common stock for
cash,
- prepare the entry.

Cash 1,000

Common Stock 1,000

(1,000 x 1$)

- Assume that Hydro-Slide, Inc. issue 2,000 share of 1$ par-value common stock per par,
prepare Hydro-Slide’s journal entry if:

(a) 1,000 share are issued for 1$.

(b) 1,000 shares are issued for 1$.

Answer:

(a):

Cash 1,000

Common Stock 1,000

(1,000 x 1$)

(b):

Cash 5,000
(1,000 x 5$)
Common Stock 1,000
(1,000 x 1$)
Paid in Capital in 4,000
excess of par value

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INTERMIDIATE ACCOUNTING CHAPTER 3

 Stock Holder Equity:

Common Stock XX
+
Paid in Capital XX
Total Paid in Capital XX
+
(given) Retained Earning XX
Stock holder equity XX

Example:
Common Stock 2,000$
+
Paid in Capital 4,000$
Total Paid 6,000$
+
Retained Earning 27,000$
Stock holder equity 33,000$

Note: Any expense in the corporation called Organizational Expense.

 Assume that attorneys have helped Jordan Company incorporate. They

have billed the company $5,000 for their services. They agree to accept 4
,000 shares of $1 par value common stock in payment of their bill. At the
time of the exchange, there is no established market price for the stock.
Prepare the journal entry for this transaction.

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INTERMIDIATE ACCOUNTING CHAPTER 3

Organizational expense 5,000

Common Stock 4,000

(4,000 x 1$)
Paid-in capital 1,000
in excess of par

 Assume that Athletic Research Inc. is an existing publicly held corporation. Its $5 par
value stock is actively traded at $8 per share. The company issues 10,000 shares of
stock to acquire land recently advertised for sale at $90,000. Prepare the journal
entry for this transaction.

Land 80,000

Common Stock 50,000

(10,000 x 5$)
Paid-in capital 30,000
in excess of par

A- True or False Questions:

1. The number of common shares outstanding can never be greater than the number of
shares issued.
2. The par value of common stock must always be equal to its market value on the date the
stock is issued.
3. The cash proceeds from issuing par value stock may be equal to or greater than, but not
less than par value.
4. Stock can be issued only in exchange for cash.

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INTERMIDIATE ACCOUNTING CHAPTER 3

5. Retained earnings are subtracted from paid-in capital to arrive at total

stockholders’equity.

6- The par value of common stock must always be equal to its market value on the date
the stock is issued.

7- A corporation can issue more shares than it is authorized in its charter, if the board of
directors approves of an increase in the number of authorized shares.

8- The market value of a corporation's stock is determined by the number of shares that
the corporation has been authorized to issue.

9- Each stockholder in a corporation has a separate capital account in the stockholders'

equity section of the balance sheet.

10- Dividends are declared out of retained earnings.

11- When a corporation has only one class of capital stock, it is identified as preferred
stock.

12- Retained earnings are a part of stockholders' equity.

13- Stock can be issued only in exchange for cash.

B- Multiple Choices Questions:

1. New Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When
the transaction is recorded, credits are made to:

a. Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $4,000.

b. Common Stock $14,000.

c. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $4,000.

d. Common Stock $10,000 and Retained Earnings $4,000.

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INTERMIDIATE ACCOUNTING CHAPTER 3

2. If Vickers Company issues 2,000 shares of $5 par value common stock for $140,000, …
a. Common Stock will be credited for $140,000.
b. Paid-In Capital in Excess of Par Value will be credited for $10,000.
c. Paid-In Capital in Excess of Par Value will be credited for $130,000.
d. Cash will be debited for $130,000.
3. If Kiner Company issues 1,000 shares of $5 par value common stock for $70,000, the
account ……
a. Common Stock will be credited for $5,000.
b. Paid-in Capital in Excess of Par Value will be credited for $5,000.
c. Paid-in Capital in Excess of Par Value will be credited for $70,000.
d. Cash will be debited for $65,000.
4. Becker Company is a publicly held corporation whose $1 par value stock is actively
traded at $20 per share. The company issued 2,000 shares of stock to acquire land recently
advertised at $50,000. When recording this transaction, Becker Company will ……
a. debit Land for $50,000.
b. credit Common Stock for $40,000.
c. debit Land for $40,000.
d. credit Paid-In Capital in Excess of Par Value for $48,000.
5. Simon Company issued 6,000 shares of its $5 par value common stock in payment of its
attorney's bill of $45,000. The bill was for services performed in helping the company
incorporate. Simon should record this transaction by debiting ……
a. Legal Expense for $30,000.

b. Legal Expense for $45,000.

c. Organization Expense for $30,000.

d. Organization Expense for $45,000.

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INTERMIDIATE ACCOUNTING CHAPTER 3

6. If common stock is issued for an amount greater than par value, the excess should be
credited to ……
a. Cash.
b. Retained Earnings.
c. Paid-in capital in excess par value.
d. Legal Capital.
7. In the financial statements, organization costs appear ……
a. Immediately below Retained Earnings in the stockholders’equity section.
b. In the income statement.
c. As part of paid-in capital in the stockholders’equity section.
d. As an intangible asset.
8. Which of the following represent the largest number of common shares?
a. Treasury shares.
b. Issued shares.
c. Outstanding shares.
d. Authorized shares.
9. Retained earnings ……….
a. is unique to the corporate form of business .
b. is an optional account in the partnership form of business.
c. reflects cash paid in by shareholders to date.
d. is closed at the end of the year

A- True or False Questions

1- ( True ) 2- ( False ) 3- ( False ) 4- ( False )
5- ( False ) 6- ( False ) 7- ( False ) 8- ( False )
9- ( False ) 10- (True) 11- ( False ) 12- (True)
13-( False )

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