Accounting for common stock issuance
2. Issuing common stock for noncash assets and services
Common stock can be issued in exchange for noncash assets such as land, buildings, or equipment and for services (e.g., legal, accounting, consulting). As such a transaction represents a noncash transaction, the cost principle should be applied: the cost equals the cash equivalent price (i.e., the fair market value).
In the case of the issuance of common stock for noncash assets and services, the cost is equivalent to the fair market value of the:
- Consideration given up (i.e., fair market value of the stock), or
- Consideration received (i.e., fair market value of services, noncash assets)
It depends on which fair market value is more readily determinable. The board of directors has the right to determine the fair market value of the noncash assets or services received in exchange for the common stock. Usually, this transaction is based on the fair market value of the stock (i.e., consideration given up). However, when the fair market value of the stock cannot be determined, the fair market value of the assets or services received could be used.
In any case, the par value or stated value of the common stock doesn’t affect the value of the noncash assets or services received.
2.1. Example of issuing common stock for noncash assets and services
Let’s assume that Brilliant Company (a fictitious entity) issued 1,000 shares of common stock to purchase a building, which was advertised for $120,000. The par value of the stock is $1. The fair market value of the stock is $100.
In this example, the fair market value of the common stock is more readily determinable than the fair market value of the building (i.e., price listed in the advertisement might not represent the fair market value of the building). As the result, the company should record the building for $100,000 (i.e., 1,000 shares x $100) in its books, not for $120,000.
The company would make the following journal entry:
Account Titles |
Debit |
Credit |
Building* |
100,000 |
|
Common Stock |
1,000 |
|
Paid-in Capital in Excess of Par Value |
99,000 |
(*) At the end of the year, the company would also recognize depreciation expense on the building.
Let’s assume another scenario. New Brilliant Company (a fictitious entity) issued 1,000 shares of common stock to its consultants, who billed the company for $10,000 for the services provided (i.e., the fair market value of the services). The par value of the stock is $1. However, there is no market price for the common stock.
In this case, the fair market value of the services is more readily determinable that the fair market value of the stock. The company would make the following journal entry:
Account Titles |
Debit |
Credit |
Start-up and Organization Costs |
10,000 |
|
Common Stock |
1,000 |
|
Paid-in Capital in Excess of Par Value |
9,000 |
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