Question

CDD Corp., was organized on January 2, 2018. During the first year of operation, CDD issued 60,000 shares of $3 par value common stock at a price of $40 cash per share. On December 31, 2018, CDD reported Net Income of $200,000 and paid $40,000 cash dividends. Use this information to determine the dollar amounts that CDD will report on its year-end Balance Sheet for Paid in Capital Common Stock in Excess to par.

Acct. 220

Answer 1

CDD Corp., was organized on January 2, 2018. During the first year of operation, CDD issued 60,000 shares of $3 par value common stock at a price of $40 cash per share.

On December 31, 2018, CDD reported Net Income of $200,000 and paid $40,000 cash dividends.

Use this information to determine the dollar amounts that CDD will report on its year-end Balance Sheet for Paid in Capital Common Stock in Excess to par.

.

Additional paid in capital Common Stock in Excess to par is reported

= ( 40 – 3 ) * 60000   = 37 * 60000 = $2220000

.

If we issue a new common stock, the cash will come and also the common stock at par increase and the excess of par is credited in Additional paid in capital – par account

Because, the journal entry for issuing new common stock is

Jan 2	Cash ( 40 * 60000 )	$2400000
	Common stock ( 3 * 60000 )		$180000
	Additional paid in capital Common Stock –in Excess to par (2400000 – 180000)		$2220000

.

So the amount of $2220000 are increased in this account

.

How ever in the case of reporting Net income, the year end net income is closed to Retained earnings

The entry is

Dec 31	Net Income	$200000
	Retained earnings		$200000

When the dividend is declared it is deducted from retained earnings

The entry is

Dec 31	Retained earnings	$40000
	Dividend payable		$40000

*It doesn’t affect Additional paid in capital