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 00 shares. Let us also assume that
the par value of the stock is $10. !ere is the "ournal entry that the company will
make following the sale of the shares#
$ash %00 shares & $50' 10,000
$ommon (tock %00 shares & $10'' ,000
Add)l *aid in $apital %10,000 + ,000' ,,000
-he "ournal entry involves the following aspects#
1. $ash is increased .y the num.er of shares sold multiplied .y the market price
of the stock to reflect the receipt of the proceeds
. (tockholder's e/uity is increased .y $10,000 to reflect the issuance of the
stock. -his total is divided .etween the common stock account and the
additional paid in capital account. 0oth of these are stockholder's e/uity
accounts.
1. -he common stock account is increased .y the par value multiplied .y the
num.er of shares sold. -he par value is an ar.itrary amount set .y the .oard
of directors when the class of stock is authori2ed .y the shareholders for
issuance.
3. -he additional paid+in+capital account is increased .y the e&cess of the
proceeds from the stock sale less that portion of the proceeds credited to the
common stock account.
$ommon stock can also .e authori2ed as no par. 4n this case, no par value is
assigned to the shares. 5rom 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 e&ists as follows#
$ash %00 shares & $50' 10,000
$ommon (tock %00 shares & $50'' 10,000
A third form for the stock is no par with a stated value. 5rom an accounting
standpoint, stated value is treated the same way as par value. 5or e&ample,
assume that the common stock in this e&ample is no par stock with a stated
value of $5. -he "ournal entry for the stock issuance would .e as follows#
$ash %00 shares & $50' 10,000
$ommon (tock %00 shares & $5'' 1,000
Add)l *aid in $apital %10,000 + 1,000' 6,000
(tock issuance costs#
7hen companies issue common stock, the stock is sold through .rokers to their
retail or institutional clients. -hese .rokers earn a fee for their services and the
proceeds received .y the company is reduced accordingly. -here are two ways in
which these stock issuance costs can .e accounted for under 8AA*.
Copyright 2001 by Robert F. Halsey. All rights reserved.
1. -reat the issue costs as a reduction of the amounts paid in. -he de.it to cash
and the credit to additional paid+in+capital are reduced accordingly. -his
method results in a smaller increase in stockholder's e/uity upon issuance of
the shares.
. $apitali2e the amount as an organi2ational cost on the .alance sheet and
amorti2e the this intangi.le asset similarly to the amorti2ation of goodwill. -his
method results in a greater increase in stockholder's e/uity initially and
reduced profita.ility in the future as the amorti2ation e&pense is recorded.
Copyright 2001 by Robert F. Halsey. All rights reserved.
Accounting for stock repurchases (treasury stock)
-he following e&ample illustrates the accounting for stock repurchases %treasury
stock' utili2ing the cost method. -his is the most common approach. 9nder this
method, an account called treasury stock is de.ited for the cost of the shares
repurchased. -his treasury stock account is a contra+e/uity account. -hat
means, it is included in stockholder's e/uity, .ut is reflected as a negative amount
%hence the use of the word :contra:'. 7hen the shares are su.se/uently re+
issued, treasury stock is credited for the cost of the shares and any difference
.etween the re+issue price and this cost is reflected as an ad"ustment to
additional paid+in+capital form treasury stock.
Assume that a company repurchases 1,000 shares at a current market price of
$5 per share. -he "ournal entry the company will make is,
-reasury stock %1,000 & 5' 5,000
$ash 5,000
4f 500 shares are su.se/uently sold at a market price of $10, the "ournal entry to
reflect this sale is as follows#
$ash %500 & 10' 15,000
-reasury stock %500 & 5' 1,500
Additional paid+in+capital ,500
4f the resale price is less than the original purchase price, additional paid+in+
capital is de.ited and if there is not a sufficient .alance in the additional paid+in+
capital account to a.sor. the de.it, retained earnings is de.ited for the e&cess.
Copyright 2001 by Robert F. Halsey. All rights reserved.
Accounting for Stock Dividends
-he accounting for stock dividends is divided into two categories# small stock
dividends %generally less than 0+5; of the outstanding shares' and large stock
dividends %greater than 5; of the outstanding shares'. 5urthermore, two dates
are important# the declaration date %when the dividend is declared to .e paid .y
the .oard of directors' and the date of distri.ution %then the chares are actually
sent to the shareholders'.
Small stock dividends.
7hen a company declares a small stock dividend, retained earnings is de.ited
for the market value of the shares to .e distri.uted. (ince new shares are to .e
issued, shareholder's e/uity must .e increased to reflect this and the credit to
common stock and additional paid+in+capital is the same as would .e made had
the firm sold stock. 5or e&ample, assume that a company has 100,000 shares
outstanding and declares a 10; stock dividend. -he company will issue 10,000
shares %100,000 shares & 10;' as a dividend to e&isting shareholders. Also
assume that the market value of the stock is $0 per share and that its par value
is $5. -he re/uired "ournal entries are as follows#
<eclaration date
=etained earnings %10,000 & $0' 00,000
$ommon stock dividend distri.uta.le 50,000
Additional paid+in+capital 150,000
<istri.ution date
$ommon stock dividend distri.uta.le 50,000
$ommon stock 50,000
Large stock dividends.
7hen a company declares a large stock dividend, retained earnings is de.ited
for the par value of the shares to .e distri.uted and the additional paid+in+capital
account is not affected. 5or e&ample, assume that the company in our previous
e&ample declares a 50; stock dividend. -he company will issue 50,000 shares
%100,000 shares & 50;' as a dividend to e&isting shareholders. -he re/uired
"ournal entries are as follows#
<eclaration date
=etained earnings %50,000 & $5' 50,000
Copyright 2001 by Robert F. Halsey. All rights reserved.
$ommon stock dividend distri.uta.le 50,000
<istri.ution date
$ommon stock dividend distri.uta.le 50,000
$ommon stock 50,000
Copyright 2001 by Robert F. Halsey. All rights reserved.