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Correcting Entries for Equity Transactions

9. (Correcting Entries for Equity Transactions) Pistons Inc. recently hired a new
accountant with extensive experience in accounting for partnerships. Because of the
pressure of the new job, the accountant was unable to review what he had learned
earlier about corporation accounting. During the first month, he made the following
entries for the corporation's capital stock.

May 2 Cash 192,000
Capital Stock 192,000
(Issued 12,000 shares of $5 par value common stock at $16 per share)

10 Cash 600,000
Capital Stock 600,000
(Issued 10,000 shares of $30 par value preferred stock at $60 per share)

15 Capital Stock 15,000
Cash 15,000
(Purchased 1,000 shares of common stock for the treasury at $15 per share)

31 Cash 8,500
Capital Stock 5,000
Gain on Sale of Stock 3,500
(Sold 500 shares of treasury stock at $17 per share)

Instructions
On the basis of the explanation for each entry, prepare the entries that should have
been made for the capital stock transactions.

Solution Preview

May 2 Cash 192,000
Capital Stock 192,000
(Issued 12,000 shares of $5 par value common
stock at $16 per share)

When stock is issued and the issue price is above the par value, the difference between the issue price and par value is credited to additional paid-in capital. The par value is $5 and the issue price is $16, so $11 per share is additional paid-in capital. Also if it is common tock that is issued that shoul dbe recoreded as common stock. The correct journal entry is
May 2 Cash 192,000
...

Solution Summary

The solution explains the correct method for recording certain capital stock transactions.

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