Question

Allam, Inc. contracted for services to be provided over a period of time with full payment in Allam's $2 par common stock when the service is completed. At the time of the agreement, Allam stock was trading at $20 per share. The agreed-upon total value of the contract is $20,000. When the service was completed, Allam's stock price was $25 per share. Therefore, AllamA. Recognizes $25,000 of expense.B. Increases the common stock account $1,600.C. Increases contributed capital in excess of par $23,000.D. Debits a liability for $25,000.

Answer 1

Answer:

Correct option is

B. Increases the common stock account $1,600

Explanation:

Provided information,

We have the following details for the contract,

Agreed price of the contract = $20,000

Payment to be made only at completion of contract.

On the date of agreement price of stock = $20

Par value $2

Thus, number of shares to be issued = $20,000/$20 = 1,000 shares.

On the date of completion of contract, stock price = $25

Thus, number of shares to be issued = $20,000/$25 = 800 shares.

Increase in common stock = 800 $\times$ $2 = $1,600

As there is issue of common stock.

Expense is of $20,000 only, therefore, option A is incorrect.

Increase in contributed capital = 800 $\times$ $23 (25 - 2) = $18,400

Liability if will arise then will be of $20,000 only.

Therefore, correct option is

B. Increases the common stock account $1,600