Chapter 11, Problem 1MCQ

To determine

Common stock: It shows the value of shareholders’ capital in the company. it means the amount invested by the owner of the company.

To identify: The correct option to record the transaction.

Answer:

'Option e is correct

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
	Cash		48,000
	Common Stock		30,000
	Paid in capital in excess of par value			18,000
	(Being shares issued at above face value )

Explanation of Solution

• Cash is an asset. Since, cash is received, it increases asset. Hence debit cash account
• Common stock is equity. Since, shares is issued, it increases equity. Hence, credit common stock account.
• Paid in capital in excess of par value is part of a shareholder’s fund. Since, money is received, it increases equity. Hence, credit paid in capital in excess of par value.

Option a:

Option a- is incorrect. As debit in paid in capital in excess of par value will reduce equity but in issue, equity increases.

Option b:

Option b-is incorrect. As 6,000 shares of $5 face value is issue. So, it will only increase common stock by $30,000.

Option c:

Option c- is incorrect. As paid in capital in excess of par value will only increase by $18,000 and not $30,000 because paid in capital in excess of par value is received for 6,000 shares of $3 each.

Option d:

Option d is incorrect. A credit to cash means reduction in asset but in issue, asset increases.

Conclusion

Thus, the correct option is e.