Question

1. 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. On hundred thousand shares of stock were initially issued.
   1. What dollar amount would initially be recorded in the common stock account?
   2. If a par value on the common stock were set at $0.01 per share, show how the initial equity investment would be recorded.
   3. 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.
   4. 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 stockholder’s equity at the end of one year.

Answer 1

Please see below answers:-

A)$100,000 would be recorded initially in the common stock account. The common stock account is a security that represents ownership in a corporation.

B)If a par value on the common stock were set at $0.01 per share , then the initial equity investment would be recorded

as $1000 (100000 shares *$0.01 per share).

C)If 20,000 additional shares of stock are sold at $5 per share to an angel investor six months after initial corporation, then

In Part A , answer is $200,000 would be recorded in common stock account ($100,000 plus 20,000 additional shares *$5 per share) if the common stock did not have par value.

In part B , answer is $1200 ( 100,000 shares *$0.01 per share plus 20,000 additional shares *$0.01 per share) given par value of $0.01 per share.

D) Common staock account should be recorded as $120,000 ($100,000 plus $20,000)

Additional paid-in-capital account would be recorded as $80000 (20000 shares *$4 per share) taking into account per share price over and above par value.

Retained earnings would be operation loss of $80,000 in first year.

Stockholder's equity can be calculated by taking the sum of share capital and retained earnings equals to $120,000 ($200,000-$80,000 )