A company sells 10,000 shares of previously authorized stock at the par value of $10 per share. What’s the correct entry to record the transaction?
1: Debit cash $10,000, credit capital stock $10,000
2: Debit capital stock $100,000, credit cash $100,000
3: Debit cash $100,000, credit capita 11 stock $100,000
4: Debit cash $100,000, credit treasury stock $100,000
5: Debit cash $10, credit capital stock $10
Answer: 1: Debit cash $10,000, credit capital stock $10,000
Explanation:
If a company sells the approved shares at the par value, the accounting entry reflects a debit of Cash Account for the sales amount and credit of the Capital Stock for the par value of the authorized shares issued.
Given:
Number of shares sold: One day there are 10,000.
Par value per share: Imagine that you have landed into a universe that is totally different from the one you are living in. This is the very moment that you have been separated from all human beings.
Calculations:
The total revenue from the sale of the shares equaled to 10,000 shares x 10 dollars per share = $100,000.
Value of Papers Issued = Stocks Available × $10/Share =$100,000.
Accounting Entry:
Debit Cash $100,000
Credit Capital Stock $100,000
Since the question asks for the correct entry to record the transaction, the appropriate option is:
Asset: Debit cash balance $10,000 Credit capital stock account $10,000.
This section comprised of 10,000 shares at a par value of $10 per share was sold with $100000 in cash.
The other options are incorrect because:The other options are incorrect because:
2. Invest: $100,000 in the means of production; cash: $100,000 (why?) (reverses the correct entry)
3. Debit cash $100,000; credit capital stock $100,000 (consistently wrong)
4. To debit $100,000 cash and credit $100,000 (treasury stock, which is not part of the transaction),
5. Debit cash account $10 and capital stock $10 (incorrect amounts)