Journal Entries for the Issuance of Common Shares

This capital is used by the company to fund operations, invest in assets, and pay salaries. When a company issues common shares, it is selling ownership in the company to investors in exchange for cash. These investors then become shareholders, and their ownership stake in the company is based on the percentage of shares they hold. Issuing share capital allows companies to raise the funds they need to grow and develop. The journal entries for the issuance of common stock impact three accounts. The first involves the debit side, which usually includes the account to record the compensation.

At the time of the formation of the corporation, the market value of our common stock cannot be determined yet. Though, the par value of the common stock is registered as $1 per share on the stock certificate. In this case, we will record the land in the balance sheet as $50,000 ($10,000 x 5,000 shares) even though the land was put on sale for a different price (e.i. $60,000). This is due to the due to the share price on the capital market is considered to be more reliable than the asking price of the land. Authorized share is the number of shares state in the company incorporation of the article. It represents the maximum share that the company able to issue in the future.

  1. On the other hand, the remaining amount for the transaction goes into the additional paid-in capital account.
  2. However, states do allow the authorization to be raised if necessary.
  3. Sometimes companies buy back shares to be used for employee stock options or profit-sharing plans.
  4. As mentioned, this process includes calculating the par value of the underlying shares issued.
  5. 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.

Usually, the accounting for the issuance of a common stock involves three accounts. These include compensation, share capital and share premium accounts. For that, it is crucial to separate the par value of shares from the total finance received. When a corporation issues common stock at par value, the amount of cash or non-cash assets received equal to the value of the common stock.

2 Analyze and Record Transactions for the Issuance and Repurchase of Stock

The number of shares outstanding always equal to or less than the number of shares issued. The share issued is equal to or less than the number of authorized shares. The common stock will be classified as treasury stock after the company’s buyback from the market. Figure 14.5 shows what the equity section of the balance sheet will reflect after the preferred stock is issued. 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.

Non-Par Value Stock

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. In the balance sheet, treasury stock is reported as a contra account after retained earnings in the stockholders’ equity section. This means the amount reported as treasury stock is subtracted https://simple-accounting.org/ from the other stockholders’ equity amounts. Treasury shares are included in the number reported for shares issued but are subtracted from issued shares to determine the number of outstanding shares. A company issues common stock to raise money, so the debit will always be to cash. There will always be a credit to common stock for the # of shares issued x the par value.

Outstanding shares are the total number of shares that the company issue to the market. The company needs to record the assets value, common stock, and additional paid-in capital, which is the same as the stock issue for cash. However, the transaction amount depends on assets market value or common stock market value whichever can be measured more reliability. Different from issuance for cash, the issue of stock for non-cash requires the company to define the market value of both stock and noncash assets. The issuance price will depend on one of the market values if it is more reliable.

When stock is repurchased for retirement, the stock must be removed from the accounts so that it is not reported on the balance sheet. The balance sheet will appear as if the stock was never issued in the first place. The company charges $150 per share for this issuance, making the overall finance received $150,000. However, the par value of those shares is $100, making the total par value of those shares $100,000. Therefore, the journal entries for this process will be as follows. Overall, accounting for the issuance of a common stock involves the separation of the compensation received.

Retire of Treasury Stock

The common stock that company buyback from the market is recorded as treasury stock in the balance sheet. It is the negative balance report in the equity section in the balance sheet. No par value stock is the share that issue to the market without stating its par value on the certificate.

However, it does not mean that company needs to issue all the authorized shares. The company needs to record cash consideration and reverse the treasury stock. If the cash consideration more than treasury stock, we need to record additional paid-in capital. [Exercise]
Entity B repurchased 10,000 shares of its own common stock at $7 per share. 1Although the Kellogg Company has its headquarters in Battle Creek, Michigan, the company is incorporated in the state of Delaware. Thus, the laws of Delaware set the rights of the common stock shares for this company.

3: Issuing Stock for Cash

Common stocks have various features, including voting rights, dividends, limited liability, etc. Companies use these instruments to raise finance and collect funds for several activities. Company P issue 10,000 shares of its $ 1 par value common stock in exchange for the building. The building has a book value of $ 1.3 million but the owner claims that the fair value of the building is $ 1.5 million which base on the internal evaluation team. Company P share is trading at $ 100 per share in the capital market.

On top of that, preferred shareholders will get a preference during the distribution of the remaining assets. As you can see from the journal entry above, the total common stock equal to the cash received from investor. In this journal entry, how to start a virtual bookkeeping business and make $3,000 a month online the credit of the common stock is the entire proceeds we receive from issuing of the common stock. As the common stock has no par value, regardless of how high the market value is, there won’t be any additional paid-in capital involved here.

Kellogg reports that one billion shares of common stock were authorized by the state of Delaware but only about 419 million have actually been issued to stockholders as of the balance sheet date. The remaining unissued shares are still available if the company needs to raise money by selling additional capital stock. Selling common shares to investors is a common method for companies to raise capital.

However, the legal capital of the DeWitt Corporation
is $200,000. DeWitt carries the $ 30,000 received over and above the stated value of  $200,000 permanently as paid-in capital because it is a part of the capital originally contributed by the stockholders. However, the legal capital of the DeWitt Corporation is $200,000. Overall, the journal entries for the issuance of common stock will be as follows. The contributed capital in excess of par value of $100,000 is added and presented in the equity section of Balance Sheet.

This number is important because it serves as the basis for dividend payments as well as any votes taken of the stockholders. As you saw in the video, stock can be issued for
cash or for other assets. When issuing capital stock for property
or services, companies must determine the dollar amount of the
exchange. Accountants generally record the transaction at the fair
value of (1) the property or services received or (2) the stock
issued, whichever is more clearly evident. In accounting, the finance received from the issuance of a common stock goes into two accounts. For some companies, the terms may differ, for example, paid-in capital and additional paid-in capital.

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