Not his lexicon!
Balance Tricks can be cheeky!
Posted on 08/27/2009 8:20:11 AM PDT by LouAvul
On a balance sheet, where would the following entry be made?
"Capital Stock, $1 par, 10,000 shares issued and outstanding."
Is this an asset or liability and how is it handled?
Thanx.
Only if the difference between the square roots of the 3-digit security codes that you will find on the right on the back of your card is a prime number.
Don’t forget the Accrued Dividends. FIFO FIFO, Fight, fight, fight.
Man, I'm screwed; I though square roots were vegetables...
It belongs in the equity section. 100% sure...final answer.
Nowhere, this is not a balance sheet entry. Capital stock is an Equity item, but the entry would have to represent the actual amount invested. Is this is a question for a course you are taking?
Be careful, Grasshopper. Much of the advice on this thread will get you 5-10 at Leavenworth.
Very funny stuff but somewhat less than optimal in the GAAP sense.
Debits to the left, credits to the right, debits = credits, fight, fight, fight!
You are correct in that the total Capital Stock on the balance sheet would be the amount paid into the corporation for that stock.
If the investors paid the par value of $1.00 per share the entry would be:
Debit Cash $10,000
Credt Captial Stock ($1 par) $10,000
If they paid $10 per share it would be:
Debit Cash $100,000
Credit Capital Stock ($1 Par) $10,000
Credit Addtional Paid in Capital in Excess of par $90,000
The Additionl Paid in Capital in Exess of Par would also appear in the Equity section of the balance sheet.
LouAvul wrote:
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First, the disclaimer, I am neither a lawyer nor a CPA.
Now for the basic Accounting. On a balance sheet, everything must balance. Hence the name. And the balance is this: Assets = Liabilities + Owner Equity (Capital).
Also, Debits always balance to credits. Assets have a debit balance, and increasing their value is a debit. Liabilities and Equities have a credit balance, and increasing those is a credit entry in a transaction.
So there is a transaction when you start your business. The owner(s) invest something of value (often cash that is deposited in the corporate bank account). This results in an increase in the value of the asset account (perhaps Cash in Bank Account) and a corresponding increase in owner equity account (Common Stock Outstanding).
State laws vary, but usually the stockholder(s) must invest the par value of the common stock when the corporation is formed as one of the first transactions on the corporate books. So, the transaction for the common stock issued would be a debit to Cash in bank of $10,000, and a credit to Common Stock of $10,000. If this were the only transaction, the balance sheet after this single transaction would be
Assets:
Cash in Bank $10,000
-------
Total Assets $10,000
Liabilities:
Total Liabilities 0
Owner Equity:
Common Stock Outsanding $10,000
-------
Total Owner Equity $10,000
It’s probably a little late now, but if you are starting a corporation for a new business, it’s best to start with a minimal value for the common stock. Setting up with 10,000 shares at a par value of $0.01 is common. This means you only invest $100.00 in owner’s equity at the formation of the corporation.
If you invest more cash in the business to get started, it’s often smarter from a legal and accounting standpoint to write a promissory note or bond from the corporation and loan the corporation money. You can then secure the loan to any assets the corporation holds or acquires. You can also make some income from reasonable interest on the loan. And if everything goes badly, your main loan is a secured loan, and you are one of the secured creditors for most of your investment, and split the assets at liquidation time with other secured creditors. Stockholders are at the end of the line if the corporation liquidates. So you’d rather be a secured creditor who loaned the corporation money than a common stockholder with an equity position.
Again, I am not an attorney or a CPA, and you should discuss these options with your CPA and your attorney before taking any actions.
Oh, and welcome to the world of entrepreneurship.
Not his lexicon!
Balance Tricks can be cheeky!
Winner, winner, chicken dinner. (See my name.)
Since you are neither, you should not give advice as though you were. There could be consequences of setting that low a par value and only investing $100 in the corporation.
I like yours better!
Now I’m flashing back to my lost days at Cal State Fullerton, wallowing through all those business classes. LIFO, FIFO... Ack!
I wish!
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All accouting threads are Freepers calling out for more Anna pictures. |
as someone about to take the CPA this coming Monday, that had me ROFL!!!
LOL! You guys are killing me!
If I pass the exam this Monday, I may see if I can change my username. I have always wanted to be a CPA.
Good Luck!
Good luck, Charlie. The exam is always a fun time! Passed mine in 1978.
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