APPLY THE CONCEPTS: Issuing Capital Stock When stock is sold, the monetary amoun
ID: 2492367 • Letter: A
Question
APPLY THE CONCEPTS: Issuing Capital Stock
When stock is sold, the monetary amount gained from the sale is divided into two parts. First, the par value of the stock is recorded when received for the sale. Second, any amount received above the par value for the stock is recorded as paid-in capital in excess of par (also called additional paid-in capital).
Suppose a company is authorized by its articles of incorporation to sell 67,500 shares of $2 par value common stock. On November 26, the company issues 27,000 shares of common stock for a selling price of $13 per share. The company will receive cash of $. It will record common stock in the amount of $ and paid-in capital in excess of par (common) of $.
The same company is also authorized by its charter to sell 2,000 shares of preferred stock with a par value of $22 per share. On November 26, the company issues 667 shares of preferred stock with an 8% dividend rate and a selling price of $24 per share. The company will receive cash of $. It will record preferred stock in the amount of $ and paid-in capital in excess of par (preferred) of $.
Issuance of Stock
When a company wants to raise a significant amount of capital without incurring debt, it may choose to issue stock. An important part of this process is deciding how many shares will be authorized and issued. The number of shares of stock that a corporation is authorized to issue is indicated in the articles of incorporation and is the total number of shares of a certain type of stock (either common or preferred) that may ever be sold. The term issued refers to the number of shares actually issued to the stockholders (this number can never be greater than the number of shares authorized).
The shares remaining in the hands of stockholders are called outstanding shares. Note that the outstanding shares can never be greater than the number of shares issued.
Suppose a company selling stock for the first time has articles of incorporation that indicates that the maximum number of shares that can ever be sold is 43,000. Of that amount, 21,500 shares are sold to the public. After the initial sale, 17,200 shares were reacquired by the company.
How many shares has the company authorized?
How many shares has the company issued?
How many shares are outstanding?
Explanation / Answer
(1) Issuing stock:
For stock sale on Nov 26,
Cash received = 27,000 x $13 = $351,000
Common stock to be recorded = 27,000 x $2 = $54,000
Paid-in capital in excess of par value = $(351,000 - 54,000) = $297,000
(2) Issuing preferred stock:
Cash received = 667 x $24 = $16,008
Preferred stock to be recorded = 667 x $22 = $14,674
Paid-in capital in excess of par = $(16,008 - 14,674) = $1,334
(3)
Shares authorized = 43,000
Shares issued = 21,500
Shares outstanding = (21,500 - 17,200) = 4,300