Issuance of Common Stock example
Let's assume that a company wants to raise $10,000 through the issuance of
common stock. At the time the stock is sold the market price is $50 per share.
the company will, therefore, have to issue 200 shares. Let us also assume that
the par value of the stock is $10. Here is the journal entry that the company will
make following the sale of the shares:
Cash (200 shares x $50)
10,000
Common Stock (200 shares x $10))
2,000
Add’l Paid in Capital (10,000 - 2,000)
8,000
The journal entry involves the following aspects:
1. Cash is increased by the number of shares sold multiplied by the market price
of the stock to reflect the receipt of the proceeds
2. Stockholder's equity is increased by $10,000 to reflect the issuance of the
stock. This total is divided between the common stock account and the
additional paid in capital account. Both of these are stockholder's equity
accounts.
3. The common stock account is increased by the par value multiplied by the
number of shares sold. The par value is an arbitrary amount set by the board
of directors when the class of stock is authorized by the shareholders for
issuance.
4. The additional paid-in-capital account is increased by the excess of the
proceeds from the stock sale less that portion of the proceeds credited to the
common stock account.
Common stock can also be authorized as no par. In this case, no par value is
assigned to the shares. From an accounting standpoint, the only effect of this
designation is that the common stock account is credited for the full amount of
the proceeds and no additional paid-in-capital account exists as follows:
Cash (200 shares x $50)
10,000
Common Stock (200 shares x $50))
10,000
A third form for the stock is no par with a stated value. From an accounting
standpoint, stated value is treated the same way as par value. For example,
assume that the common stock in this example is no par stock with a stated
value of $5. The journal entry for the stock issuance would be as follows:
Cash (200 shares x $50)
10,000
Common Stock (200 shares x $5))
1,000
Add’l Paid in Capital (10,000 - 1,000)
9,000
Stock issuance costs:
When companies issue common stock, the stock is sold through brokers to their
retail or institutional clients. These brokers earn a fee for their services and the
proceeds received by the company is reduced accordingly. There are two ways
in which these stock issuance costs can be accounted for under GAAP.
Copyright © 2001 by Robert F. Halsey. All rights reserved.
1. Treat the issue costs as a reduction of the amounts paid in. The debit to cash
and the credit to additional paid-in-capital are reduced accordingly. This
method results in a smaller increase in stockholder's equity upon issuance of
the shares.
2. Capitalize the amount as an organizational cost on the balance sheet and
amortize the this intangible asset similarly to the amortization of goodwill. This
method results in a greater increase in stockholder's equity initially and
reduced profitability in the future as the amortization expense is recorded.
Copyright © 2001 by Robert F. Halsey. All rights reserved.
Accounting for stock repurchases (treasury stock)
The following example illustrates the accounting for stock repurchases (treasury
stock) utilizing the cost method. This is the most common approach. Under this
method, an account called treasury stock is debited for the cost of the shares
repurchased. This treasury stock account is a contra-equity account. That
means, it is included in stockholder's equity, but is reflected as a negative
amount (hence the use of the word "contra"). When the shares are subsequently
re-issued, treasury stock is credited for the cost of the shares and any difference
between the re-issue price and this cost is reflected as an adjustment to
additional paid-in-capital form treasury stock.
Assume that a company repurchases 1,000 shares at a current market price of
$25 per share. The journal entry the company will make is,
Treasury stock (1,000 x 25)
25,000
Cash
25,000
If 500 shares are subsequently sold at a market price of $30, the journal entry to
reflect this sale is as follows:
Cash (500 x 30)
15,000
Treasury stock (500 x 25)
12,500
Additional paid-in-capital
2,500
If the resale price is less than the original purchase price, additional paid-incapital is debited and if there is not a sufficient balance in the additional paid-incapital account to absorb the debit, retained earnings is debited for the excess.
Copyright © 2001 by Robert F. Halsey. All rights reserved.
Accounting for Stock Dividends
The accounting for stock dividends is divided into two categories: small stock
dividends (generally less than 20-25% of the outstanding shares) and large stock
dividends (greater than 25% of the outstanding shares). Furthermore, two dates
are important: the declaration date (when the dividend is declared to be paid by
the board of directors) and the date of distribution (then the chares are actually
sent to the shareholders).
Small stock dividends.
When a company declares a small stock dividend, retained earnings is debited
for the market value of the shares to be distributed. Since new shares are to be
issued, shareholder's equity must be increased to reflect this and the credit to
common stock and additional paid-in-capital is the same as would be made had
the firm sold stock. For example, assume that a company has 100,000 shares
outstanding and declares a 10% stock dividend. The company will issue 10,000
shares (100,000 shares x 10%) as a dividend to existing shareholders. Also
assume that the market value of the stock is $20 per share and that its par value
is $5. The required journal entries are as follows:
Declaration date
Retained earnings (10,000 x $20)
200,000
Common stock dividend distributable
Additional paid-in-capital
50,000
150,000
Distribution date
Common stock dividend distributable
Common stock
50,000
50,000
Large stock dividends.
When a company declares a large stock dividend, retained earnings is debited
for the par value of the shares to be distributed and the additional paid-in-capital
account is not affected. For example, assume that the company in our previous
example declares a 50% stock dividend. The company will issue 50,000 shares
(100,000 shares x 50%) as a dividend to existing shareholders. The required
journal entries are as follows:
Declaration date
Retained earnings (50,000 x $5)
Copyright © 2001 by Robert F. Halsey. All rights reserved.
250,000
Common stock dividend distributable
250,000
Distribution date
Common stock dividend distributable
Common stock
Copyright © 2001 by Robert F. Halsey. All rights reserved.
250,000
250,000