Common Stock Issuance - Financial Accounting

1. Pacific Industries issued 20,000 shares of common stock with $2 par value in a public offering. The stock was sold to underwriters for $22 per share, and the underwriters sold it to the public for $24 per share. Pacific also paid $18,000 in registration and legal fees. What is Pacific's net cash received from this transaction?
   Answer: $422,000 Pacific receives cash from the underwriters, not the public. Cash from underwriters = 20,000 × $22 = $440,000. Net cash = $440,000 - $18,000 registration fees = $422,000. Choice A ignores the registration fees. Choice C uses the public offering price incorrectly. Choice D uses public price minus fees ($480,000 - $18,000), which is incorrect since Pacific doesn't receive the public price.
2. Summit Technologies issued 30,000 shares of no-par common stock with a stated value of $3 per share for $20 per share. The company's articles of incorporation specify that 25% of the proceeds must be allocated to legal capital. What amount should be recorded in the Common Stock account?
   Answer: $150,000 When you encounter no-par stock with specific allocation requirements in the articles of incorporation, you need to focus on what the corporate documents actually require for legal capital, not just the stated value. Let's work through this step-by-step. Summit issued 30,000 shares at $20 per share, generating total proceeds of $30,000 \times \$20 = \$600,000$. The key detail is that the articles of incorporation require 25% of proceeds to be allocated to legal capital (the Common Stock account). Therefore: $\$600,000 \times 0.25 = \$150,000$ goes to Common Stock, with the remaining $450,000 recorded as Additional Paid-in Capital. Answer D ($150,000) is correct because it properly applies the 25% allocation requirement specified in the articles of incorporation. Answer A ($510,000) incorrectly allocates 85% of proceeds to Common Stock, which would mean putting only 15% in Additional Paid-in Capital—backwards from what's required. Answer B ($90,000) appears to multiply the stated value by shares ($$30,000 \times \$3$$), but this ignores the articles of incorporation requirement entirely. Answer C ($600,000) puts all proceeds in Common Stock, missing the fact that only 25% belongs there. Remember this key principle: For no-par stock, always check the articles of incorporation for specific allocation requirements. The stated value becomes irrelevant when the corporate documents specify a different allocation method. Don't let stated value distract you from what the legal documents actually require.
3. Stratus Corp. issued 5,000 units for a total price of $440,000. Each unit consists of one share of $50 par value preferred stock and two shares of $5 par value common stock. On the issuance date, the market price of the preferred stock was $60 per share, and the market price of the common stock was $20 per share. What amount of the proceeds should be credited to Additional Paid-in Capital—Common Stock?
   Answer: $126,000 This is a lump-sum issuance that requires allocating the proceeds based on the relative fair market values of the securities (proportional method). 1. Calculate the total number of common shares issued: 5,000 units * 2 shares/unit = 10,000 shares. 2. Determine the total fair market value of the securities if sold separately: Preferred: 5,000 shares $60/share = $300,000. Common: 10,000 shares $20/share = $200,000. * Total FMV = $300,000 + $200,000 = $500,000. 3. Determine the proportion of total FMV attributable to the common stock: $200,000 / $500,000 = 40%. 4. Allocate proceeds to the common stock: $440,000 (total proceeds) * 40% = $176,000. 5. Calculate the par value of the common stock issued: 10,000 shares * $5/share = $50,000. 6. Calculate the Additional Paid-in Capital for common stock: $176,000 (allocated proceeds) - $50,000 (par value) = $126,000.
4. Mensa Corp. issued 10,000 shares of its $1 par value common stock to acquire a patent. The patent has no established fair market value. Mensa's stock is very thinly traded, and no reliable market price can be determined. The board of directors, after careful consideration, assigned a value of $75,000 to the patent. What is the credit to Additional Paid-in Capital as a result of this transaction?
   Answer: $65,000 When stock is issued for a non-cash asset and neither the stock nor the asset has a readily determinable fair market value, the board of directors may assign a value to the transaction. This board-assigned value is used to record the transaction. 1. Total value of the transaction (debit to Patent) = $75,000. 2. Credit to Common Stock (par value) = 10,000 shares * $1/share = $10,000. 3. Credit to Additional Paid-in Capital = Total value - Par value = $75,000 - $10,000 = $65,000.
5. In its first year of operations, Orion Corp. issued 50,000 shares of $1 par common stock for $10 per share. It paid $40,000 in legal and printing fees related to the issuance. The company's bookkeeper incorrectly recorded these fees as an operating expense, which was closed to Retained Earnings at year-end. All other aspects of the transaction were recorded correctly. What is the effect on the balance sheet accounts of a correcting entry, assuming it is made in the following year?
   Answer: Decrease Additional Paid-in Capital by $40,000 and increase Retained Earnings by $40,000. Stock issuance costs should reduce Additional Paid-in Capital (APIC), not be expensed. The incorrect entry debited an expense account, which ultimately reduced Retained Earnings. The correct entry would have debited APIC. * Incorrect State: APIC is overstated by $40,000 (because the debit was not made to it). Retained Earnings is understated by $40,000 (because an expense was incorrectly recorded). * Correction: To fix this, APIC must be decreased (debited) by $40,000, and Retained Earnings must be increased (credited) by $40,000 to reverse the prior-period expense. The net effect on total stockholders' equity is zero.
6. Mountain Corp. issued 18,000 shares of $6 par value common stock for land with an appraised value of $400,000. However, the land was recently purchased by the seller for $350,000, and similar companies' stock trades at $20 per share. Mountain's stock is not publicly traded. What amount should be credited to Additional Paid-in Capital?
   Answer: $292,000 When stock is issued for non-cash assets and the stock is not publicly traded, use the fair value of the asset received. The appraised value ($400,000) represents the most reliable fair value measurement. Common Stock = 18,000 × $6 = $108,000. Additional Paid-in Capital = $400,000 - $108,000 = $292,000. Choice A uses similar companies' stock price (18,000 × $20 = $360,000; $360,000 - $108,000 = $252,000). Choice C uses the seller's cost ($350,000 - $108,000). Choice D appears to be a calculation error.
7. Lyra Corp. received subscriptions for 40,000 shares of its $5 par value common stock at a subscription price of $22 per share. At the time of subscription, subscribers paid 40% of the total price, with the remainder due in six months. What amount should Lyra credit to Additional Paid-in Capital on the date the subscriptions are recorded?
   Answer: $680,000 When stock is subscribed, the full amount of Common Stock Subscribed and Additional Paid-in Capital is recorded at the time of the subscription, not as cash is collected. A receivable is established for the unpaid amount. 1. Total subscription price = 40,000 shares * $22/share = $880,000. 2. Total par value to be subscribed = 40,000 shares * $5/share = $200,000. 3. Total Additional Paid-in Capital = Total price - Total par value = $880,000 - $200,000 = $680,000. The journal entry is: Debit Subscriptions Receivable for $880,000, Credit Common Stock Subscribed for $200,000, and Credit Additional Paid-in Capital for $680,000.
8. Phoenix Industries issued 25,000 shares of $5 par value common stock in exchange for equipment with a fair value of $400,000. The stock was not publicly traded, but similar companies' stock was trading at $14 per share. What amount should be recorded as Additional Paid-in Capital?
   Answer: $275,000 When stock is issued for non-cash assets, the transaction is recorded at the fair value of the consideration received ($400,000). Common Stock is recorded at par value: 25,000 × $5 = $125,000. Additional Paid-in Capital = $400,000 - $125,000 = $275,000. Choice B uses the similar companies' stock price instead of equipment fair value. Choice C incorrectly uses the similar companies' stock price minus par. Choice D records only the par value portion.
9. Helio Corporation is authorized to issue 2,000,000 shares of $1 par value common stock. On March 15, Helio issued 100,000 shares of this stock for cash at a price of $18 per share. What is the total amount that should be credited to the Additional Paid-in Capital account as a result of this transaction?
   Answer: $1,700,000 When common stock is issued for cash, the Cash account is debited for the total proceeds. The Common Stock account is credited for the par value of the shares issued, and the Additional Paid-in Capital (APIC) account is credited for the excess of the proceeds over the par value. 1. Total proceeds = 100,000 shares * $18/share = $1,800,000. 2. Credit to Common Stock = 100,000 shares * $1/share par value = $100,000. 3. Credit to APIC = Total proceeds - Par value = $1,800,000 - $100,000 = $1,700,000. The authorized shares are irrelevant to this specific transaction.
10. A company's trial balance includes a debit balance of $120,000 in the Subscriptions Receivable—Common Stock account, and credit balances of $40,000 in Common Stock Subscribed and $320,000 in Additional Paid-in Capital. The subscription price was $18 per share. All subscribers have now paid the remaining balance on their subscriptions. What is the correct journal entry to record the issuance of the stock?
    Answer: Debit Common Stock Subscribed $40,000; Credit Common Stock $40,000. When subscribed shares are fully paid, two entries are typically needed: one to record the final cash receipt and another to issue the stock. The question asks for the entry to issue the stock. This entry simply reclassifies the equity from 'Subscribed' to 'Issued'. It involves debiting the Common Stock Subscribed account to close it and crediting the Common Stock account. The Additional Paid-in Capital was already recorded at the time of subscription and is not affected by the final issuance entry.
11. Meridian Corporation issued 50,000 shares of its $2 par value common stock for $18 per share. The company also incurred $15,000 in direct issuance costs that were paid in cash. What is the net increase in stockholders' equity as a result of this transaction?
    Answer: $885,000 The net increase in stockholders' equity is calculated as: (50,000 shares × $18 per share) - $15,000 issuance costs = $900,000 - $15,000 = $885,000. The issuance costs reduce the amount of additional paid-in capital recorded. Choice B ignores the issuance costs. Choice C uses only the par value ($2 × 50,000). Choice D incorrectly adds the issuance costs instead of subtracting them.
12. Vela Corp. issued 1,000 'packages' of securities for a total of $1,200,000. Each package contains 10 shares of $2 par common stock and 5 shares of $100 par preferred stock. A reliable market price of $110 per share was available for the preferred stock, but there was no established market for the common stock. What amount should be credited to the Common Stock account?
    Answer: $20,000 This lump-sum sale requires the incremental method because only one security's fair value is known. The question asks for the credit to the Common Stock account, which is always the par value of the shares issued. 1. Calculate the total number of common shares issued: 1,000 packages * 10 shares/package = 10,000 shares. 2. Calculate the par value of the common stock issued: 10,000 shares * $2 par/share = $20,000. The other calculations (allocating proceeds) are necessary to find APIC, but not the credit to the Common Stock account itself. The total proceeds allocated to common equity would be $1,200,000 - (5,000 preferred shares * $110 FMV) = $650,000, but this is split between Common Stock ($20,000) and APIC-Common ($630,000).
13. Based on the information in the passage, what is the balance in Draco Corp.'s Additional Paid-in Capital—Common Stock account on December 31?
    Answer: $1,355,000 The ending balance is calculated by adjusting the beginning balance for the APIC effects of each transaction. 1. Beginning Balance: $800,000. 2. March 1 Issuance: Proceeds = 20,000 $16 = $320,000. Par value = 20,000 $1 = $20,000. APIC increase = $320,000 - $20,000 = $300,000. 3. Registration Fees: These costs reduce APIC. APIC decrease = ($15,000). 4. June 15 Issuance: Value of services = $95,000. Par value = 5,000 * $1 = $5,000. APIC increase = $95,000 - $5,000 = $90,000. 5. September 30 Issuance: Use fair value of the asset received. Value = $190,000. Par value = 10,000 * $1 = $10,000. APIC increase = $190,000 - $10,000 = $180,000. 6. Ending Balance: $800,000 + $300,000 - $15,000 + $90,000 + $180,000 = $1,355,000.
14. On July 1, Nimbus Inc. issued 30,000 shares of its $10 par value common stock in exchange for a parcel of land. On this date, the stock was actively traded at a market price of $22 per share. The land had an appraised value of $690,000 for property tax purposes. What amount should Nimbus credit to Additional Paid-in Capital for this transaction?
    Answer: $360,000 When stock is issued for a non-cash asset, the transaction should be recorded at the fair market value of the stock issued or the asset received, whichever is more reliably determinable. Since the stock is actively traded, its market price is the more reliable measure. 1. Total value of the transaction = 30,000 shares * $22/share = $660,000. This is the amount debited to Land. 2. The credit to Common Stock is the par value = 30,000 shares * $10/share = $300,000. 3. The credit to Additional Paid-in Capital is the excess = $660,000 - $300,000 = $360,000.
15. Juno Corp. issues 20,000 shares of its no-par common stock for cash at $30 per share. The corporation's board of directors assigned a stated value of $5 per share to the stock. Which of the following is the correct journal entry to record this transaction?
    Answer: Debit Cash $600,000; Credit Common Stock $100,000; Credit Additional Paid-in Capital $500,000. For no-par stock with a stated value, the stated value is treated in the same manner as par value. 1. The debit to Cash is for the total proceeds: 20,000 shares * $30/share = $600,000. 2. The credit to Common Stock is for the total stated value: 20,000 shares * $5/share stated value = $100,000. 3. The credit to Additional Paid-in Capital is the excess of proceeds over the stated value: $600,000 - $100,000 = $500,000.
16. Coastal Corp. authorized 200,000 shares of $1 par value common stock. On January 15, the company issued 60,000 shares for $12 per share. On March 10, the company issued an additional 40,000 shares for $15 per share. What is the balance in the Common Stock account after both issuances?
    Answer: $100,000 When you encounter stock issuance questions, focus on the distinction between par value and market value. The Common Stock account records only the par value of shares issued, not the total cash received. Let's calculate the Common Stock account balance step by step. On January 15, Coastal Corp. issued 60,000 shares with $1 par value, contributing $60,000 \times \$1 = \$60,000$ to the Common Stock account. On March 10, they issued 40,000 additional shares at $1 par value, adding $40,000 \times \$1 = \$40,000$. The total Common Stock account balance is $\$60,000 + \$40,000 = \$100,000$. Answer A ($600,000) incorrectly calculates 60,000 shares times the $10 premium from the first issuance ($12 - $1). Answer B ($1,320,000) represents the total cash received from both issuances: $(60,000 \times \$12) + (40,000 \times \$15) = \$720,000 + \$600,000$. This confuses cash received with the Common Stock account balance. Answer C ($720,000) only accounts for the total cash from the first issuance, ignoring the second transaction entirely. Remember that stock issuances create two separate accounting effects: the Common Stock account records par value only, while any amount received above par value goes to Additional Paid-in Capital. Always multiply the number of shares by the par value—not the issuance price—when calculating the Common Stock account balance.
17. Aquila Corp. issued 15,000 shares of its true no-par common stock in exchange for consulting services. The services have a readily determinable fair value of $450,000. The board of directors did not assign a stated value to the stock. Which of the following statements correctly describes the accounting for this transaction?
    Answer: A $450,000 credit should be made to the Common Stock account, with no entry to Additional Paid-in Capital. For true no-par stock (with no stated value), the entire proceeds from the issuance are credited to the Common Stock account. There is no concept of par or stated value to separate the capital into two accounts. The 'proceeds' in a non-cash transaction are measured by the fair value of the asset or service received, which is $450,000. Therefore, the journal entry is a debit to Consulting Expense (or a relevant asset) for $450,000 and a credit to Common Stock for $450,000.
18. On January 2, a company's stockholders' equity section was as follows: Common stock, $10 par, 100,000 shares issued and outstanding, $1,000,000; Additional paid-in capital, $4,000,000; Retained earnings, $5,000,000. On March 1, the company issued an additional 20,000 shares of common stock for $35 per share. What is the total amount of paid-in capital immediately after the March 1 issuance?
    Answer: $5,700,000 Total paid-in capital is the sum of the Common Stock account and the Additional Paid-in Capital account. The transaction increases both of these accounts. 1. Calculate beginning total paid-in capital: $1,000,000 (Common Stock) + $4,000,000 (APIC) = $5,000,000. 2. Calculate the proceeds from the new issuance: 20,000 shares * $35/share = $700,000. 3. The entire proceeds from the stock issuance represent an increase in total paid-in capital. 4. Calculate the new total paid-in capital: $5,000,000 (beginning balance) + $700,000 (from new issuance) = $5,700,000. Retained earnings are not part of paid-in capital.
19. Cygnus Corp. issued 100,000 shares of its $2 par value common stock for $15 per share. In connection with this issuance, Cygnus incurred $75,000 in underwriter fees and $25,000 in legal fees. What is the net credit to Additional Paid-in Capital from this transaction?
    Answer: $1,200,000 Stock issuance costs are not expensed; instead, they reduce the net proceeds from the stock sale, thereby reducing the amount credited to Additional Paid-in Capital (APIC). 1. Calculate gross proceeds: 100,000 shares * $15/share = $1,500,000. 2. Calculate gross credit to APIC (before costs): ($15 - $2 par) * 100,000 shares = $1,300,000. 3. Calculate total issuance costs: $75,000 + $25,000 = $100,000. 4. Calculate net credit to APIC: Gross APIC - Issuance Costs = $1,300,000 - $100,000 = $1,200,000.
20. Carina Corp. issued 10,000 shares of its $10 par value common stock upon the conversion of $250,000 face value of its convertible bonds. At the time of conversion, the unamortized premium on the bonds was $15,000, and the fair market value of the common stock was $32 per share. Using the book value method to account for the conversion, what amount should be credited to Additional Paid-in Capital?
    Answer: $165,000 The book value method records the issuance of stock at the carrying amount (book value) of the converted bonds. No gain or loss is recognized. 1. Calculate the carrying amount of the bonds: Face Value + Unamortized Premium = $250,000 + $15,000 = $265,000. This is the total value assigned to the stock issuance. 2. Calculate the par value of the common stock issued: 10,000 shares * $10/share = $100,000. 3. Calculate the credit to Additional Paid-in Capital: Carrying Amount of Bonds - Par Value of Stock = $265,000 - $100,000 = $165,000. The fair market value of the stock ($320,000) is ignored under the book value method.

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