Question

A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first month of business. The lawyer's normal fee is $15,000 for similar work. Which of the following would be the impact on the accounting equation if the stock is not currently trading?

a.
A decrease to Common Stock for $10,000

b.
An increase to Common Stock for $15,000

c.
A decrease to Additional Paid-In Capital—Common Stock of $5,000
term-31
d.
An increase to Additional Paid-In Capital—Common Stock of $5,000

Answer 1

The impact on the accounting equation would be a decrease to Additional Paid-In Capital—Common Stock of $5,000.

Step-by-step explanation:

The impact on the accounting equation if the stock is not currently trading would be (c) A decrease to Additional Paid-In Capital—Common Stock of $5,000.

When a company issues stock in exchange for services, it is considered a non-cash transaction. Since the normal fee for the lawyer's services is $15,000 but the stock is valued at $5 par, the Additional Paid-In Capital—Common Stock account will decrease by $5,000, which is the difference between the fair value of the services provided ($15,000) and the par value of the stock issued ($5 x 2,000 = $10,000).