A company issues 100,000 shares of preferred stock for $40 a share. The stock has a fixed dividend rate of 5% and a par value of $3 per share. The company records the issuance with a:
A) debit of $4 million to Cash and a credit of $4 million to Preferred Stock.
B) debit of $300,000 to Cash and a credit of $300,000 to Preferred Stock.
C) debit of $4 million to Cash, a credit of $300,000 to Preferred Stock, and a credit of $3.7 million to Additional Paid-in Capital.
D) debit of $300,000 to Cash, a debit of $3.7 million to Long-term Investments, a credit of $300,000 to

Question

Quizplus · Accepted Answer

The issuance of preferred stock is recorded by debiting the cash received, in this case $4 million, and crediting the preferred stock account for the par value of the stock, which is $300,000 ($3 per share x 100,000 shares). The excess of the purchase price over the par value is credited to additional paid-in capital, which is $3.7 million ($40 purchase price - $3 par value x 100,000 shares). Therefore, the correct answer is C.

A Company Issues 100,000 Shares of Preferred Stock for $40