Stockholders' Equity

A company issues new shares of common stock at a price above par value. The excess proceeds over par value are recorded to:

1. A.Accounts payableWrong. Accounts payable is a liability owed to trade creditors, unrelated to a stock issuance.
2. B.Retained earningsWrong. Retained earnings reflects accumulated net income less dividends, not capital contributed by shareholders.
3. C.Treasury stockWrong. Treasury stock reflects shares the company has repurchased, not shares it has newly issued.
4. D.Additional paid-in capitalCorrect. APIC records proceeds received above par or stated value.

Why: Additional paid-in capital (APIC) captures proceeds received from shareholders in excess of a stock's par or stated value. Retained earnings, by contrast, reflects accumulated net income less dividends paid — capital contributed by shareholders and profit earned by the company are two separate equity components.

Fictional issuer Meridian Tools Inc. reports total assets of $420 million and total liabilities of $275 million on its balance sheet. What is stockholders' equity?

1. A.$695 millionWrong. This adds assets and liabilities instead of subtracting.
2. B.$155 millionWrong. This is an arithmetic slip in the subtraction ($420M − $275M ≠ $155M).
3. C.$420 millionWrong. This ignores liabilities entirely and just restates total assets.
4. D.$145 millionCorrect. $420 million − $275 million = $145 million.

Why: Stockholders' equity equals total assets minus total liabilities: $420 million − $275 million = $145 million.