Chapter 10, Problem 60E

Issuing Common Stock

Carmean Products Inc. sold 32,350 shares of common stock to stockholders at the time of its incorporation. Carmean received S42 per share for the stock.

Required:

1. Assume that the stock has a $22 par value per share. Prepare the journal entry to record the sale and issue of the stock.
2. Assume that the stock has a $8 stated value per share. Prepare the journal entry to record the sale and issue of the stock.
3. Assume that the stock has no par value and no stated value. Prepare the journal entry to record the sale and issue of the stock.
4. CONCEPTUAL CONNECTION How do the different par values affect total contributed capital and total stockholders’ equity?

To determine

(a)

Introduction:

A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay the dividend periodically. Common stock is also referred to as common shares.

To record:

Journal entry for the issue of stock with $22 as par value.

Answer to Problem 60E

Journal Entry for issuance common stock

Date	Particulars	Debit ($)	Credit ($)
Not given	Cash Dr. Common Stock Additional Paid-in Capital (common stock)	1,358,700	711,700 647,000

Explanation of Solution

Given:

32,350 shares of common stock issued at $42 (par value $22).

When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.

Journal Entry for issuance common stock

Date	Particulars	Debit ($)	Credit ($)
Not given	Cash Dr. Common Stock Additional Paid-in Capital (common stock)	1,358,700	711,700 647,000

Cash = $\text{No}\text{. of shares × Issue Price per share}$

Cash = $\text{32,350 × \$42}$

Cash = $1,358,700

Common Stock = $\text{No}\text{. of shares × Par value}$

Common Stock = $\text{32,350 × \$22}$

Common Stock = $711,700

Additional Paid-in Capital (common stock) = $\text{No}\text{. of shares × Price paid par value}$

Additional Paid-in Capital (common stock) = $\text{32,350 × \$20}$

Additional Paid-in Capital (common stock) = $647,000.

To determine

(b)

Introduction:

A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

To record:

Journal entry for the issue of stock with $8 as stated value.

Answer to Problem 60E

Journal Entry for issuance common stock

Date	Particulars	Debit ($)	Credit ($)
Not given	Cash Dr. Common Stock Additional Paid-in Capital (common stock)	1,358,700	258,800 1,099,900

Explanation of Solution

Given:

32,350 shares of common stock issued at $42 (stated value $8).

When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.

Journal Entry for issuance common stock

Date	Particulars	Debit ($)	Credit ($)
Not given	Cash Dr. Common Stock Additional Paid-in Capital (common stock)	1,358,700	258,800 1,099,900

Cash = $\text{No}\text{. of shares × Issue Price per share}$

Cash = $\text{32,350 × 42}$

Cash = $1,358,700

Common Stock = $\text{No}\text{. of shares × Stated value}$

Common Stock = $\text{32,350 × \$8}$

Common Stock = $258,800

Additional Paid-in Capital (common stock) = $\text{No}\text{. of shares × Price paid above Stated value}$

Additional Paid-in Capital (common stock) = $\text{32,350 × \$34}$

Additional Paid-in Capital (common stock) = $1,099,900.

To determine

(c)

Introduction:

A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

The interest expense to be shown in Income Statement for year 2023.

Answer to Problem 60E

Journal Entry for issuance common stock

Date	Particulars	Debit ($)	Credit ($)
Not given	Cash Dr. Common Stock	1,358,700	1,358,700

Explanation of Solution

Given:

32,350 shares of common stock issued (no par value or stated value).

When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.

Journal Entry for issuance common stock

Date	Particulars	Debit ($)	Credit ($)
Not given	Cash Dr. Common Stock	1,358,700	1,358,700

Cash = $\text{No}\text{. of shares × Issue Price per share}$

Cash = $\text{32,350 × 42}$

Cash = $1,358,700

Common Stock = $\text{No}\text{. of shares × Issue Price per share}$

Common Stock = $\text{32,350 × 42}$

Common Stock = $1,358,700.

To determine

(d)

Introduction:

A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

To explain:

The effect of par value on capital contributed and total stockholders’ equity.

Answer to Problem 60E

The total capital contributed and total shareholders’ equity remains unchanged if there is change in the par value of shares issued.

Explanation of Solution

The effect of Par value on:

1. Contributed Capital: The contributed capital is divided into two accounts, i.e., Common Stock and Additional Paid-in (common stock). Par value is the minimum value for which a company can issue its common stock.

Change in par value doesn’t affect the contributed capital as a whole. It affects the common stock account which is the amount that received for issuing stock at par value; the additional amount is recorded in the Additional Paid-in (common stock).

Hence, it can be concluded that larger the par value, smaller will be the additional paid-in capital.

2. Total Stockholders’ Equity: Total Shareholders’ equity includes various components. Some of the are:
• Common Stock
• Additional Paid-in (common stock)
• Preferred Stock
• Additional Paid-in (Preferred stock)
• Retained Earnings

Change in par value doesn’t affect total shareholders’ equity as a whole.

For instance, the issue price of a common stock is $25 (wherein $10 is par value and 20 shares have been issued).

This means,

Common Stock = $\$10\times 20$ = $200

Additional Paid-in (common stock) = $\$15\times 20$ = $300

Total Stockholders’ Equity = Common Stock + Additional Paid-in (common stock)

Total Stockholders’ Equity = $200 + $300

Total Stockholders’ Equity = $500

Now, the issue price increased to $20. This means,

Common Stock = $\$20\times 20$ = $400

Additional Paid-in (common stock) = $\$5\times 20$ = $100

Total Stockholders’ Equity = Common Stock + Additional Paid-in (common stock)

Total Stockholders’ Equity = $400 + $100

Total Stockholders’ Equity = $500

Hence, the total shareholders’ equity remains unchanged.