Journal Entry for Issuance of Common Stock

Rapidly growing companies often have share splits to keep the per share price from reaching stratospheric levels that could deter some investors. In the final analysis, understand that a stock split is mostly cosmetic as it does not change the underlying economics of the firm. If the cash proceeds are higher than the bonds payable amount, the resulting difference will be recorded as a premium on bonds. Contrarily, when the cash proceeds are lower than the bonds payable amount, it will be recorded as a discount. Bonds are typically issued when companies require funding for long-term projects.

  • In this case, the company can make the sale of common stock journal entry by debiting the cash account and crediting the common stock account and additional paid-in capital account.
  • Two common accounts in the equity section of the balance sheet are used when issuing stock—Common Stock and Additional Paid-in Capital from Common Stock.
  • Likewise, the company needs to make the sale of common stock journal entry when such transactions occur.

The journal entry for issuing the common stock for cash will increase both total assets and total equity on the balance sheet. In the company as a corporation, we may issue the common stock for cash for expanding the business operation. Likewise, we need to make the journal entry for issuing the common stock in order to account for the increase in the capital section of the equity on the balance sheet.

What is the difference between a par value and a no-par stock?

The contributed capital in excess of par value of $100,000 is added and presented in the equity section of Balance Sheet. Let’s assume that ABC Corporation issues 50,000 shares with the par value of $10 per share for cash of $500,000. Common shares may also be referred to as common stock, ordinary shares, junior equity, or voting shares. There are several types of bonds such as zero-coupon bonds, convertible bonds, high-yield bonds, and so on. The bond types vary by features carried by the bond such as the interest rate, frequency of coupon payments, maturity date, attached warrants, and so on. Let us discuss what is the issuance of bonds and what is the accounting treatment for them.

Stock with no par value that has been assigned a stated value is treated very similarly to stock with a par value. The common stock, sometimes, is issued for non-cash assets; for example in exchange for land or building, or sometimes in exchange for not paying organization expenses to the promoters. Such non-cash assets are then recorded at the market values as of the date of transactions. However, the company ABC pays $80,000 (including the brokerage fee) with its surplus cash for this repurchase of 10,000 shares of common stock. And later, on March 31, the company ABC decides to retire these 10,000 shares of common stock in order to increase its EPS ratio.

In this case, the debit side of the journal entry will be the expense amounting to the cost or the fair value of the service that needs to be charged to the income statement instead. A company might purchase its own outstanding stock for a number of possible reasons. It can be a strategic maneuver to prevent another company from acquiring a majority interest or preventing a hostile takeover. A purchase can also create demand for the stock, which in turn raises the market price of the stock.

Par value stock

The company simply combines the repurchase and retirement of common stock together. In this case, the company can make the sale of common stock journal entry by debiting the cash account and crediting the common stock account and additional paid-in capital account. Treasury stock is the corporation’s issued stock that has been bought back from the stockholders. As a corporation cannot be its own shareholder, any shares purchased by the corporation are not considered assets of the corporation. Assuming the corporation plans to re‐issue the shares in the future, the shares are held in treasury and reported as a reduction in stockholders’ equity in the balance sheet. Shares of treasury stock do not have the right to vote, receive dividends, or receive a liquidation value.

No Par Common Stock Journal Entry

Additionally, even though some jurisdictions allow the issuance of the common stock below its par value, such activity is usually very rare. Figure 14.5 shows what the equity section of the balance sheet will reflect after the preferred stock is issued. The market price per share, on the other hand, refers to the per share value or worth at which a company’s stock is actually traded in secondary market. Unlike par value, a stock’s market price is generally subject to frequent fluctuations and is largely determined by investors’ perception towards the future of stock and the operations of its issuing company. Once set, par value of stock remains fixed forever unless the issuing company executes a forward or reverse stock split to increase or decrease the number of its outstanding shares.

Impact on statement of cash flows

Common shares are one type of security that companies may issue to raise capital. Common shares represent an asset to the holder of the shares (the owner of the common shares) and are classified as equity on the corporation which issued the common shares. Additional paid-in capital of $90,000 comes from the of selling price of $100,000 (100,000 x $10) minus the $10,000 (which is the par value of $1 multiply with 100,000 shares).

Since we have used the straight-line amortization method, the accounting entry will be the same every year. The accounting treatment for the issuance of bonds will depend on the amortization of interest and the issue price of the bonds. This means that if a firm were to issue $3 million in bonds with a 10% interest rate, it would receive $3 million and pay back the amount in future interest payments. On the other hand, if a corporation issues preferred stock, this stock’s par value is meaningful since its dividends are expressed as a percentage of the preferred stock’s par value. In the early chapters of this textbook, “retained earnings” was defined as all income reported over the life of a business less all dividend distributions to the owners. Apparently, this definition is not absolutely correct in all possible cases.

To sum up, the journal entry for issuing common stock varies depending on each type of issuance. This includes the common stock issued at par value, at no par value, at the stated value, and finally the common stock issued for noncash assets. When par value stock is issued at a discount, the assets received both cash or noncash assets is lower than the value of the common stock. In practice, the discount on the stock is prohibited in most jurisdictions.

Companies often establish two separate “capital in excess of par value” accounts—one for common stock and one for preferred stock. They are then frequently combined in reporting the balances within stockholders’ equity. Hence, we can make the journal entry for issuance of the common stock in exchange for the service by debiting the expense account and crediting the common stock account and the additional paid-in capital account. This journal entry for issuing the common stock for the $100,000 cash will increase the total assets and total equity on the balance sheet by the same amount of $100,000 as of January 1.

Retirement of common stock without recording the treasury stock

The contra account of common stock is presented as a reduction of par value stock in the balance sheet. Additionally, as there is a difference of $30,000 ($80,000 – $50,000) which is due to the company ABC paying more to repurchase the stock, there will be also a debit of retained earnings. The proceeds in excess of the stated value are recorded as additional paid in capital (APIC) and calculated as follows. The valuation of bonds at the issuance date is the present value of future payments using an interest rate that reflects the risk category of the issued bonds. When they declare a cash dividend, some companies debit a Dividends account instead of Retained Earnings.

In some states, corporations can declare preferred stock dividends only if they have retained earnings (income that has been retained in the business) at least equal to the dividend declared. Keep in mind your journal entry must always balance (total debits must equal total credits). Notice that in all the cases discussed above, both common and preferred stocks have been recorded with par value. For another example, assuming that the company ABC above pays only $40,000 for the repurchase of 10,000 shares of the common stock on January 31. The common stock was still originally issued for $5 per share with the par value of $1 per share. And the company ABC still only decide later to retire the 10,000 shares of common stock on March 31.