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).

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