Answer to Question #197367 in Accounting for Milan

Question

Alder Corp. had the following stockholders' equity balances at the beginning of the current

year:

Common stock 200,000 shares authorized, $1 par;

15,000 shares issued and outstanding $15,000

Additional paid-in capital 24,000

Retained earnings 11,000

During the current year, Alder issued 2,000 shares of common stock with a fair value of $35 per

share to Terry Brady on a subscription basis. Terry made a down payment of $3,500, but shortly

thereafter defaulted on the subscription. What would be the debit to additional paid-in capital

if Alder returned the $3,500 to Terry?

A. $73,500

B. $70,000

C. $68,000

D. $66,500

Answer 1

Solution:

The correct answer is C.

The additional paid-in capital is the excess amount the company receives over and above the par value of shares during the time of the IPO, or when the shares are issued for sale.

The additional paid-in capital formula = (Issue price – Par Value) x Number of shares

The additional paid-in capital formula = (35 – 1) $\times$ 2,000 = $\$68,000$

The debit to additional paid-in capital will be $\$68,000$

 

The $3,500 returned by Terry will only affect the initial cash transaction recorded when the shares are issued.