A company issues 1 million shares of preferred stock with a par value of $2 and a market price of $26 per share. The issuance should be recorded as:
A) a debit to Cash of $26 million and a credit to Preferred Stock of $26 million.
B) a debit to Cash of $2 million and a credit to Preferred Stock of $2 million.
C) a debit to Cash of $24 million, a debit to Treasury Stock of $2 million, and a credit to Preferred Stock of $26 million.
D) a debit to Cash of $26 million, a credit to Preferred Stock of $2 million, and a credit to Additional Paid-in

Question

Quizplus · Accepted Answer

The issuance of 1 million shares of preferred stock with a par value of $2 and a market price of $26 per share will result in a total amount of $26 million ($26 x 1,000,000) received by the company. The par value of the preferred stock is only $2, therefore, the credit to Preferred Stock account would only be for $2 million ($2 x 1,000,000). The remaining amount of $24 million would be recorded as a debit to Cash account. Lastly, the difference between the market price and the par value of the preferred stock, which is $24 million ($26 million - $2 million) would be recorded as a credit to the Additional Paid-in Capital account. There is no need to record any transaction related to Treasury Stock because the company is issuing new shares of preferred stock and not buying back any of its own shares. Therefore, the correct answer is D.

A Company Issues 1 Million Shares of Preferred Stock with a Par