Question

Olsson Corporation received a check from its underwriters for $85 million. This was for the issue of one million of its $5 par stock that the underwriters expect to sell for $85 per share. Which is the correct entry to record the issue of the stock?

Answer 1

Answer:

Cash (Dr.)                $85,000,000

       Share Capital (Cr.)                        $5,000,000

       Share Premium (Cr.)                   $85,000,000

Explanation:

The par value is simply the face value that appears on the certificate of share deposited with the depository system. When multiplied with the number of shares issued, it gives us Share Capital which in this case is $5,000,000 (5 * 1,000,000). But Olsson Corporation issued these shares at $85,000,000, this excess amount of $80,000,000 (85,000,000 - 5,000,000) is Share Premium. The appropriate entry to record the issue is:

Cash (Dr.)                $85,000,000

       Share Capital (Cr.)                        $5,000,000

       Share Premium (Cr.)                   $85,000,000