A controller issues 50,000 shares for a building, books the credit at par with no APIC, declares a 30% stock dividend at fair value, and credits gain on resale of treasury stock. Four entries, four wrong answers, and a restated equity section that the auditors will not sign.
II.I1 has one Application-skill Representative Task: prepare journal entries for equity transactions, issuance, stock dividends, splits, treasury stock, and pass-through capital activity. The traps live at the boundaries: par versus no-par, small versus large dividend, cost versus par treasury method, corporate versus pass-through capital.
When a corporation issues common stock for cash, the credit splits between Common Stock at par and Additional Paid-in Capital for the excess. The total credit equals the cash received.
Debit: Cash (proceeds received) Credit: Common Stock (shares x par value) Credit: APIC (the rest)
HIGH-FREQUENCY: APIC is the plug. Cash sets the debit, par sets the Common Stock credit, and APIC absorbs the difference. If you flip the par and excess, you understate APIC and overstate Common Stock by the same amount.
Common mistakes
- Recording stock issued for property at par value. A company swaps 50,000 shares of $2 par stock for land worth $1,400,000. Recording Land at $100,000 (par) understates assets by $1,300,000. Trap answer: $100,000. Correct: $1,400,000 at fair value, with $1,300,000 to APIC.
- Crediting APIC for a large stock dividend. A 40% dividend on 500,000 shares at $2 par when market is $30. Correct charge to RE is $400,000 (par only). Trap answer: $6,000,000 (FMV) with $5,600,000 to APIC. Large dividends use par only and never touch APIC.
- Recognizing a gain on treasury stock resale. Treasury bought at $25, resold at $32. The $7-per-share excess credits APIC-Treasury Stock, not "Gain on Sale of Treasury Stock." Companies never report income statement gains on their own stock. The trap is any answer that runs the difference through net income.
Bottom line
- Stock issued for cash credits Common Stock at par and APIC for the excess; stock issued for non-cash consideration is recorded at the fair value of the consideration received or stock given up, whichever is more reliably measurable
- Small stock dividend (under 20-25%) records at fair market value; large stock dividend (25% or more) records at par value only, like a stock split for accounting purposes
- Stock splits require no journal entry: par per share drops, share count rises, total equity unchanged
- Treasury stock is contra-equity (never an asset) at reacquisition cost; resale never produces an income statement gain or loss, and below-cost resale debits APIC Treasury Stock before Retained Earnings
Exam shortcut
For stock dividends, draw a line at 25%: under it, use FMV and credit APIC; at or above it, use par only and skip APIC. For treasury stock under the cost method, the trap is always "gain on sale" appearing on the income statement, eliminate any answer with that phrase. Stock issued for non-cash consideration always records at fair value of what came in, never at par.
The full lesson (about 4,457 words, 30 min read) adds 2 worked examples, all 10 common mistakes, a self-check, free in the app.
Learning objectives
- II.I1
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