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 |
Legal Capital |
$100,000 |
$200,000 |
$1,000,000 |