Question

A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?
1. Common stock
2. Additional paid-in capital

a. Yes
Yes

b. Yes
No

c. No
No

d. No
Yes

Answer 1

Answer:

Option C.

1. No

2. No

Explanation:

The rights are unissued common stock yet hence no double entry would be passed. The double entry will only be passed when the rights are exercised.

The double entry when the rights are exercised would be:

Dr Bank A/c XX

Cr Common stock                      XX

Cr Additional paid-in capital     XX