Accounting for common stock issuance

1.1. Example of issuing common stock for cash

Let’s assume that Brilliant Company (a fictitious entity) issues 100,000 shares of common stock for $10 per share:  the proceeds from the issuance of common stock are $1,000,000. In other words, in any scenario the company will debit the Cash account for $1,000,000. Let’s look which journal entries the company would make in different scenarios:

Scenario 1: Par value common stock has par value of $1

Account Titles

Debit

Credit

Cash

1,000,000

 

      Common Stock*

 

100,000

      Paid-in Capital in Excess of Par Value**

 

900,000

(*) 100,000 shares x $1 par value
(**) 100,000 shares x ($10 sales price – $1 par value)

The company’s balance sheet – stockholders’ equity section – would look as follows:

Contributed Capital

Common Stock, $1 par value, 100,000 shares authorized, 100,000 shares issued and outstanding

$100,000

Additional Paid-in Capital

$900,000

     Total Contributed Capital

$1,000,000

Retained Earnings

 XXX

     Total Stockholders’ Equity

 YYY (i.e., $1,000,000 + XXX)

What if the common stock was sold for $1 per share? In such a case, there would be no proceeds in excess of the par value. As the result, the company would debit Cash and credit Common Stock for $100,000 (i.e., 100,000 shares x $1).

Scenario 2: No-par common stock has stated value of $2 per share

Account Titles

Debit

Credit

Cash

1,000,000

 

      Common Stock*

 

200,000

      Paid-in Capital in Excess of Stated Value**

 

800,000

(*) 100,000 shares x $2 stated value
(**) 100,000 shares x ($10 sales price – $2 stated value)

Scenario 3: No-par common stock with no stated value

Account Titles

Debit

Credit

Cash

1,000,000

 

      Common Stock

 

1,000,000

These scenarios are summarized in the table below:

Issue 100,000 shares for $10 per share

 

Par value $1

No-par, stated value $2

No-par, no stated value

Debit

Cash $1,000,000

Cash $1,000,000

Cash $1,000,000

Credit

Common Stock $100,000

Paid-in Capital $900,000

Common Stock $200,000

Paid-in Capital $800,000

Common Stock
$1,000,000

Legal Capital

$100,000

$200,000

$1,000,000

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