Accounting for stock subscriptions
2. Accounting for subscription contracts
When the subscription contract is initially signed, the corporation first recognizes the receivable and/or down payment by crediting equity accounts in anticipation of issuing new shares. Let’s assume that Friends Corporation signs a contract with an investor to issue 100 shares of stock with a par value of $10 for $80 per share in one month. The buyer has to make a down payment of $800 at the signing date. The corporation will record the following journal entry.
Account Names |
Debits |
Credits |
Cash |
800 |
|
Subscription receivable |
7,200 |
|
Common stock subscribed |
1,000 |
|
Additional paid-in capital |
7,000 |
Common stock is $10 x 1000 shares (i.e., the amount of par value of stock). The rest of $8,000 is recorded - $7,000 - is recorded in the additional paid-in capital.
When the shares are fully paid for in one month, the common stock subscribed balance will be transferred to common stock. Note that the subscription receivable is a contra-equity account. Any receivable left outstanding on the balance sheet date would reduce total shareholder’s equity (in the same way that treasury stock reduces equity).