Chapter 13: Stockholders' Equity, Earnings and Dividends
Journal Entries to Issue Stock
Each share of common or preferred capital stock either has a par value or lacks one. The corporation’s charter determines the par value printed on the stock certificates issued. Par value may be any amount—1 cent, 10 cents, 16 cents, $ 1, $5, or $100. Low par values of $10 or less are common in our economy.
Par value gives no clue as to the stock’s market value. Shares with a par value of $5 have traded (sold) in the market for more than $600, and many $100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws permit. Par value gives the accountant a constant amount at which to record capital stock issuances in the capital stock accounts. As stated earlier, the total par value of all issued shares is generally the legal capital of the corporation.
To record the issue of common (or preferred) stock, you will:
Cash or other item received
(shares issued x price paid per share) or market value of item received
Common (or Preferred) Stock
(shares issued x PAR value)
Paid in capital in excess of par value, common (or preferred) stock
(difference between value received and par value of stock)
Keep in mind your journal entry must always balance (total debits must equal total credits). What happens if we don't have a par value? Watch this video to demonstrate par and no-par value transactions. Notice how the accounting is the same for common and preferred stock. After the video, we will look at some more examples.
To illustrate the issuance of stock for cash, assume a company issues 10,000 shares of $20 par value common stock at $22 per share. The following entry records the issuance:
Cash (10,000 shares x $22 per share)
Common Stock, $20 par (10,000 shares x $20 par per share)
Paid-In Capital in Excess of Par Value—Common (220,000 cash - 200,000 par)
To record the issuance of 10,000 shares of stock for cash.
Notice that the credit to the Common Stock account is the par value times the number of shares issued. The accountant credits the excess over par value ($20,000) to Paid-In Capital in Excess of Par Value; it is part of the paid-in capital contributed by the stockholders. Thus, paid-in capital in excess of par (or stated) value represents capital contributed to a corporation in addition to that assigned to the shares issued and recorded in capital stock accounts. The paid-in capital section of the balance sheet appears as follows:
Common stock—par value, $20; 10,000 shares
authorized, issued and outstanding
Paid-in capital in excess of par value—common
Total paid-in capital
When it issues no-par stock with a stated value, a company carries the shares in the capital stock account at the stated value. Any amounts received in excess of the stated value per share represent a part of the paid-in capital of the corporation and the company credits them to Paid-In Capital in Excess of Stated Value. The legal capital of a corporation issuing no-par shares with a stated value is usually equal to the total stated value of the shares issued.
To illustrate, assume that the DeWitt Corporation, which is authorized to issue 10,000 shares of common stock without par value, assigns a stated value of $20 per share to its stock. DeWitt issues the 10,000 shares for cash at $ 23 per share. The entry to record this transaction is:
Cash (10,000 shares x $23 per share)
Common Stock, $20 stated value (10,000 shares x $20 stated value per share)
Paid-In Capital in Excess of Stated Value—Common (230,000 cash - 200,000 stated)
To record issuance of 10,000 shares of stock for cash.
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.
A corporation that issues no-par stock without a stated value credits the entire amount received to the capital stock account. For instance, consider the DeWitt Corporation’s issuance 10,000 shares of no-par stock for $250,000. If no stated value had been assigned, the entry would have been as follows:
Common Stock, no par
To record issuance of 10,000 shares for cash.
Since the company may issue shares at different times and at differing amounts, its credits to the capital stock account are not uniform amounts per share. This contrasts with issuing par value shares or shares with a stated value. The actual capital contributed by stockholders is $250,000. In some states, the entire amount received for shares without par or stated value is the amount of legal capital. The legal capital in this example would then be equal to $ 250,000.
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.
To illustrate, assume that the owners of a tract of land deeded it to a corporation in exchange for 1,000 shares of $12 par value common stock. The land had a market value of $14,000. The required entry is:
Land (use market value)
Common Stock, $12 par (1,000 shares x $12 par)
Paid-In Capital in Excess of Par Value—Common (14,000 market value - 12,000 par)
To record the receipt of land for capital stock.
As another example, assume a firm issues 100 shares of preferred stock with a par value of $40 per share in exchange for legal services received in organizing as a corporation. The attorney previously agreed to a price of $5,000 for these legal services but decided to accept stock in lieu of cash. In this example, the correct entry is:
Organization Costs (use agreed upon price)
Preferred Stock, $40 par (100 shares x $40 par)
Paid-In Capital in Excess of Par Value—Preferred (5,000 price - 4,000 par)
To record the receipt of legal services for capital stock.
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Accounting Principles: A Business Perspective. . Authored by: James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. . Provided by: Endeavour International Corporation. . Project: The Global Text Project. . License: CC BY: Attribution
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Issuing Stock Transactions and Calculating Paid-in Capital - Financial Accounting Video. Authored by: Brian Routh TheAccountingDr. License: All Rights Reserved. License terms: Standard YouTube License