The owners of a new venture have decided to organize as a corporation. The initi

Question

The owners of a new venture have decided to organize as a corporation. The initial equity investment is valued at $100,000, reflecting contributions of the entrepreneur and her family and friends. One hundred thousand shares of stock were initially issued.

A. What dollar amount would initially be recorded in the common stock account?
B. If a par value on the common stock were set at $0.01 per share, show how the initial equity investment would be recorded.
C. Now assume that 20,000 additional shares of stock are sold to an angel investor at $5 per share six months after the initial incorporation. Show how your answer in Part A would change if the common stock did not have a par value. Also show how your answer in Part B would change given a par value of $0.01 per share.
D. At the end of the first year of operation, the venture recorded an operating loss of $80,000. Show the dollar amounts in the common stock account, the additional paid-in-capital account, and the retained earnings account at the end of one year. Also indicate the cumulative amount in stockholders

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Common Stock (Initial Investment) = 100000

Part B:

Common Stock (100000*.01) = 1000

Additional Paid in Capital = 99000

Total Stockholder's Equity = 100000

Part C:

No Par Value:

Common Stock (Initial Investment) = 100000

Common Stock (Additional Investment) = 20000*5 = 100000

Total Stockholder's Equity = 200000

With Par Value:

Common Stock (Par Value of .01) = 120000*.01 = 1200

Additional Paid in Capital = 200000 - 1200 = 198800

Total Stockholder's Equity = 200000

Part D:

Common Stock = 1200

Additional Paid in Capital = 198800

Retained Earnings = -80000

Total Stockholder's Equity = 120000

Thanks.

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