{"id":23615,"date":"2025-06-17T17:52:11","date_gmt":"2025-06-17T17:52:11","guid":{"rendered":"https:\/\/gaviki.com\/blog\/?p=23615"},"modified":"2025-06-17T17:52:14","modified_gmt":"2025-06-17T17:52:14","slug":"if-a-company-issues-2500-shares-of-2-par-value-common-stock-at-a-market-price-of-48-per-share","status":"publish","type":"post","link":"https:\/\/gaviki.com\/blog\/if-a-company-issues-2500-shares-of-2-par-value-common-stock-at-a-market-price-of-48-per-share\/","title":{"rendered":"If a company issues 2,500 shares of $2 par value common stock at a market price of $48 per share"},"content":{"rendered":"\n

If a company issues 2,500 shares of $2 par value common stock at a market price of $48 per share, which of the following is the correct financial statement effect? Increase cash by $120,000 and increase liabilities by $120,000 Increase cash by $120,000 and increase contributed capital by $120,000 Increase cash by $120,000 and increase earned capital by $120,000 Increase cash by $120,000, increase contributed capital by $60,000, and increase earned capital by $60,000<\/p>\n\n\n\n

The correct answer and explanation is:<\/strong><\/mark><\/p>\n\n\n\n

Correct Answer:<\/strong>
Increase cash by $120,000 and increase contributed capital by $120,000<\/strong><\/p>\n\n\n\n

\n\n\n\n

Explanation:<\/strong><\/h3>\n\n\n\n

When a company issues common stock, it is raising money by selling ownership shares to investors. Let\u2019s break this down:<\/p>\n\n\n\n

Details from the question:<\/strong><\/h4>\n\n\n\n
    \n
  • Number of shares issued = 2,500<\/li>\n\n\n\n
  • Par value per share = $2<\/li>\n\n\n\n
  • Market price per share = $48<\/li>\n<\/ul>\n\n\n\n

    Total Cash Received:<\/strong><\/h4>\n\n\n\n

    2,500 shares\u00d7$48=$120,000\\text{2,500 shares} \\times \\text{\\$48} = \\text{\\$120,000}<\/p>\n\n\n\n

    This amount is the cash inflow<\/strong>, as the company receives $120,000 from investors.<\/p>\n\n\n\n

    Accounting for Stock Issuance:<\/strong><\/h4>\n\n\n\n

    Stockholders’ equity increases, specifically in two accounts under equity:<\/p>\n\n\n\n

      \n
    1. Common Stock (at par value):<\/strong>
      2,500\u00d7$2=$5,0002,500 \\times \\$2 = \\$5,000<\/li>\n\n\n\n
    2. Additional Paid-In Capital (APIC):<\/strong>
      ($48\u2212$2)\u00d72,500=$115,000(\\$48 – \\$2) \\times 2,500 = \\$115,000<\/li>\n<\/ol>\n\n\n\n

      Together:<\/p>\n\n\n\n

        \n
      • Total Contributed Capital<\/strong> = Common Stock + APIC = $5,000 + $115,000 = $120,000<\/strong><\/li>\n<\/ul>\n\n\n\n

        This reflects what the owners have invested in the company.<\/p>\n\n\n\n

        Important Notes:<\/strong><\/h4>\n\n\n\n
          \n
        • Liabilities<\/strong> are not affected. The company does not owe this money back; it\u2019s an ownership transaction.<\/li>\n\n\n\n
        • Earned Capital<\/strong> (i.e., Retained Earnings) is not affected. Retained earnings come from profits, not from selling stock.<\/li>\n\n\n\n
        • The par value is just a legal minimum that doesn\u2019t affect the total cash raised meaningfully.<\/li>\n<\/ul>\n\n\n\n
          \n\n\n\n

          Conclusion:<\/strong><\/h3>\n\n\n\n

          The issuance of 2,500 shares at $48 each results in:<\/p>\n\n\n\n

            \n
          • Cash (Asset) \u2191 by $120,000<\/strong><\/li>\n\n\n\n
          • Contributed Capital (Equity) \u2191 by $120,000<\/strong><\/li>\n<\/ul>\n\n\n\n

            No effect on liabilities or earned capital.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

            If a company issues 2,500 shares of $2 par value common stock at a market price of $48 per share, which of the following is the correct financial statement effect? Increase cash by $120,000 and increase liabilities by $120,000 Increase cash by $120,000 and increase contributed capital by $120,000 Increase cash by $120,000 and increase […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-23615","post","type-post","status-publish","format-standard","hentry","category-quiz-questions"],"_links":{"self":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/23615","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/comments?post=23615"}],"version-history":[{"count":1,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/23615\/revisions"}],"predecessor-version":[{"id":23616,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/posts\/23615\/revisions\/23616"}],"wp:attachment":[{"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/media?parent=23615"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/categories?post=23615"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gaviki.com\/blog\/wp-json\/wp\/v2\/tags?post=23615"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}