Final answer:
The issuance of common stock above par value affects two accounts: Additional Paid-In Capital and Common Stock. This process helps a growing firm raise necessary capital without debt but comes with costs and expectations of returns to investors through dividends or capital gains.
Step-by-step explanation:
When a corporation issues shares of common stock for an amount above par, this typically involves two accounts: Additional Paid-In Capital and Common Stock. The par value of the stock is recorded in the Common Stock account, while any excess received over the par value is recorded in Additional Paid-In Capital.
Issuing stock allows a company to raise capital for expansion without needing to repay the funds like a loan. This increased capital can significantly help a growing firm to enhance its visibility and stand in financial markets. However, issuing stock involves costs such as fees for investment bankers and attorneys, and requires adhering to regulatory compliance with entities like the Securities and Exchange Commission (SEC). Additionally, investors expect a return on their investment either in the form of dividends or capital gains.
Essentially, when investors buy stock, they’re providing financial capital to the firm. In return, they may receive a dividend, which is a direct payment, or they might earn a capital gain by selling the stock for a higher price than they paid. The expectation of these returns influences the investor’s decision to fund a company by buying its shares.