## 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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