Accounting for common stock is very critical ranging from the date of issue of common stock to dividend declared and paid. In the previous article, we covered the cost of comm stock equity calculation. In this article, we cover how to account for the issuance of common stock. This ranges from the journal entry for issuance of common stock of all types from par value stock to no par value stock as well as stock for non-cash assets.
So let’s get started!
What is Common Stock?
First; let’s understand what is common stock? Common stock is a type of stock that gives the right to the common stockholders to have an equal right to vote at the meeting and receive the same dividend.
Theoretically, common stock can be issued at par value, no par value, at stated value, or for non-cash assets.
Journal Entry for Issuance of Common Stock: How to Account for It?
Basically, the accounting for issuance of a common stock affects the contributed capital accounts; however, nothing impacts the retained earnings. In the later section below, we will illustrate how to record the journal entry for the issuance of common stock. This includes the issuance at par value, at no par value, at a stated value, and the issuance for non-cash assets.
Issuing Par Value Stock
When a corporation issues par value of the common stock, it can be issued at par, at a premium, or a discount. Each of these cases can be exchanged for either cash or non-cash assets depending on the agreed approach.
Issuing Par Value Stock at Par
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. This means that the outstanding value of common stock and the asset received are at the same value. In order to understand clearly this, let’s see the illustration of the journal entry for this kind of issuance of common stock.
Let’s assume that ABC Corporation issues 50,000 shares with the par value of $10 per share for cash of $500,000.
Below is the journal entry for issuance of common stock at par value:
| Account | Dr | Cr |
|---|---|---|
| Cash | $500,000 | |
| Common Stock, $10 Par Value | $500,000 | |
| (Issued 50,000 shares of $10 par value of commons stock at par) |
Issue Par Value Stock at a Premium
When par value stock is issued at a premium, the assets received both cash or noncash assets are higher than the value of the common stock. For example, a cash receipt of $12 per share for common stock of $10 par value. The excess of $2 ($12 minus $10) is called a premium or capital contribution in excess of par value. To illustrate how the journal entry is, let’s assume that the total common stock issue is the same as above (50,000 shares).
Below is the journal entry for issuance of common stock at a premium:
| Account | Dr | Cr |
|---|---|---|
| Cash | $600,000 | |
| Common Stock, $10 Par Value | $500,000 | |
| Contributed Capital in Excess of Par Value, Common Stock | $100,000 | |
| (Issued 50,000 shares of $10 par value of commons stock at $12 per share) |
The contributed capital in excess of par value of $100,000 is added and presented in the equity section of Balance Sheet.
Issuing Par Value Stock at a Discount
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. This is because the regulators want to protect the creditors of the company who issues the common stock. When issuing at discount, the company is putting its creditors at risk of not being able to repay the debts to creditors. This is because there might not be enough assets to recover the debt owed to creditors in case of default.
However, if there is such discount stock, the accounting treatment would treat such discount as a reduction of par value recorded as a contra account of common stock account. This discount on common stock is not an expense in the income statement; however, as mentioned above, it is treated as a reduction of par value common stock which is presented in the balance sheet. For example, a cash receipt of $8 per share for common stock of $10 par value. This is due to a lack of interest from investors and there is only one investor is willing to pay $8 per share for 1,000 shares. The deficit of $2 per share ($8 minus $10) is called a discount on common stock.
To illustrate the accounting treatment for issuing par value stock at discount, let’s see the journal entry below:
| Account | Dr | Cr |
|---|---|---|
| Cash | $8,000 | |
| Common Stock, $10 Par Value | $10,000 | |
| Contra account of Common Stock | $2,000 | |
| (Issued1,000 shares of $10 par value of commons stock at $8 per share) |
The contra account of common stock is presented as a reduction of par value stock in the balance sheet.
Issuing No-Par Value Stock
The no-par value stock refers to the common stock that has no par value. This means that the stock is issued without assigning a stated value. Therefore, the amount that a corporation received, both cash or non-cash assets, becomes the legal capital; hence such amount is recorded entirely as common stock.
To illustrate this, let’s assume that ABC Corporation issued 1,000 shares with no par value for $50 per share. Below is the journal entry for the no par value common stock :
| Account | Dr | Cr |
|---|---|---|
| Cash | $50,000 | |
| Common Stock, No Par Value | $50,000 | |
| (Issued 1,000 shares of no par value of commons stock at $50 per share) |
As you can see from the journal entry above, the total common stock equal to the cash received from investor.
Issuing Stated Value Stock
In some cases, the common stock can also be issued a no-par value at an assigned stated value. In this case, the stated value becomes the legal capital while the amount received in excess of the stated value is treated as contributed capital in excess of the stated value of the common stock. This contributed capital in excess of stated value is recorded and presented separately in the equity section of the balance sheet.
To illustrate this, let’s assume that ABC Corporation issues1,000 shares of no par value common stock at $50 stated value for $60 cash per share.
The journal entry for such issuing stated value of common stock is as follows:
| Account | Dr | Cr |
|---|---|---|
| Cash | $60,000 | |
| Common Stock, $50 Stated Value | $50,000 | |
| Capital Contribution in Excess of Stated Value, Common Stock | $10,000 | |
| (Issued1,000 shares of $50 stated value of commons stock at $60 per share) |
Issuing Stock for Noncash Assets
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.
The accounting treatment is the same way as all the types of issuance of common stock as we have covered above. The only difference is the replacement of cash with non-cash assets.
In order to easily illustrate this, let’s assume that ABC Corporation issues 10,000 shares at $10 par value per share in exchange for land with the market value of $150,000 at the date of issuance. Thus, the journal entry for issuing common stock for noncash assets is as follows:
| Account | Dr | Cr |
|---|---|---|
| Land | $150,000 | |
| Common Stock, $10 Par Value | $100,000 | |
| Capital Contribution in Excess of Par Value, Common Stock | $50,000 | |
| (Issued 10,000 shares of $10 par value of commons stock in exchange for land with market value of $150,000) |
Conclusion
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.
