Vanya Inc.'s charter authorizes 1,000 shares of stock at a stated value of $1 per share. Vanya sells 50 shares of stock at its initial offering for $10 per share. The journal entry to record this transaction will include which of the following entries

The journal entry to record the sale of 50 shares of Vanya Inc. is as follows:

Dr Cash                            $500

Cr Common Stock                             $50

Cr Paid-in-capital or share premium $450

Explanation:

The authorization of 1000 shares implies that the authorized share capital is set at maximum of 1000 shares, no accounting entry is involved.

However, the issue of 50 shares at $10 each increases Vanya Inc. cash position by $500,hence $500 is debited to cash account.

On the flip side,the credit of $50 is posted to common stock calculated as 50 shares multiplied $1 face value of each share,but excess amount received over and above the face value of $450 is credited to either share premium or paid-in-capital account.

the correct journal entry to record this transaction should be:

Dr Cash 500

    Cr Common stock 50

    Cr Paid-in capital in excess of par value - Common stock 450

Explanation:

Since only 50 shares were sold, we must record their sale for a total of $500 (= $10 x 50).

The common stock account must always record the par value of stock: $1 x 50 = $50.

The paid-in capital in excess of par value is used to record the difference between the par value of stock and the market price: ($10 - $1) x 50 = $450

Many corporations use extremely low par values ($1) to issue stock because that way their liability to the stockholders is very low and the price of the stocks can fluctuate without any legal problems. For example, if this company set its par value at $10, then t legally cannot sell its stock at less than $10 and the market price is not set by the company, so it could have been lower.

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