Question

A premium on common stock: Multiple Choice

1. Is the difference between par value and issue price when the amount paid is below par.
2. Is prohibited in most states. Represents capital gain on sale of stock.
3. Represents profit from issuing stock.
4. Occurs when a corporation sells its stock for more than par or stated value.

Answer 1

Answer:

4) Occurs when a corporation sells its stock for more than par or stated value.

Explanation:

When a stock sells at premium it means that its selling price if higher than its par value.

When a corporation sells its stock, the amount equal to par value must be recorded under common stock account, while any additional amount of money received (premium) must be recorded under the paid-in capital in excess of par value account.

For example, the corporation sells 100 stocks at $20 (par value of 10$ per stock)

• Dr Cash account 2,000
• Cr Common Stock account 1,000
• Cr Paid-in Capital in Excess of Par Value account 1,000