6 4: Issuing Stock for Non-Cash Assets Business LibreTexts
The accounting treatment is the same way as all the types of issuance of common stock as we have covered above. The only difference is the replacement of cash with non-cash assets. To illustrate this, let’s assume that ABC Corporation issues1,000 shares of no par https://simple-accounting.org/ value common stock at $50 stated value for $60 cash per share. As you can see from the journal entry above, the total common stock equal to the cash received from investor. For example, the company ABC issues 20,000 shares of common stock at par value for cash.
- Most of the company will raise stock for the cash which is easy to manage, invest and use in the operation.
- To illustrate, assume that La Cantina issues 8,000 shares of common stock to investors on January 1 for cash, with the investors paying cash of $21.50 per share.
- Additional paid-in capital from common stock consists of the excess of the proceeds received from the issuance of the stock over the stock’s par value.
- Initially, the company had 10,000 common shares issued and outstanding.
- This time Preferred Stock and Paid-in Capital in Excess of Par – Preferred Stock are credited instead of the accounts for common stock.
This is often done by selling stocks or bonds, which represent an ownership stake in the company. The company can sell equity stock to the public by listing it on the capital market. When the company performs well, it will be able to raise more funds by issuing more stock. When a company raises capital from investors, it does so by issuing securities, which are financial instruments that represent ownership in the company or the right to receive a future financial benefit.
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Unit 13: Forms of Business Organizations
The company plans to issue most of the shares in exchange for cash, and other shares in exchange for kitchen equipment provided to the corporation by one of the new investors. Two common accounts in the equity section of the balance sheet are used when issuing stock—Common Stock and Additional Paid-in Capital from Common Stock. Common Stock consists of the par value of all shares of common stock issued. Additional paid-in capital from common stock consists of the excess of the proceeds received from the issuance of the stock over the stock’s par value.
3: Issuing Stock for Cash
When par value stock is issued at a discount, the assets received both cash or noncash assets is lower than the value of the common stock. In practice, the discount on the stock is prohibited in most jurisdictions. This is because the regulators want to protect the creditors of the company who issues the common stock.
What is Common Stock?
Of course, the par value of the common stock has nothing to do with its market value. And the real value of how much a company’s shares are actually worth and sold for is the market value, not the par value. The par value of the common stock nowadays is usually just the number on the paper. If you wish to charge more than your credit limit on a credit card, you may contact grants management process the company that issued the card and request an increase in your credit limit. If it wishes to issue more shares than the number authorized, it may approach the Board of Directors with this request. Additional paid-in capital of $90,000 comes from the of selling price of $100,000 (100,000 x $10) minus the $10,000 (which is the par value of $1 multiply with 100,000 shares).
In addition to the non-cash asset, we may also issue the common stock in exchange for the service instead. In this case, the debit side of the journal entry will be the expense amounting to the cost or the fair value of the service that needs to be charged to the income statement instead. For issuing the common stock for the non-cash assets, such as land, building, equipment, etc., the value of the share price on the market is usually used as the cost of the non-cash asset in the exchange. However, if the share price is not available on the market, the cost of the non-cash asset will be used instead. Recording common stock issued is an important part of managing your business’s finances.
Just after the issuance of both investments, the stockholders’ equity account, Common Stock, reflects the total par value of the issued stock; in this case, $3,000 + $12,000, or a total of $15,000. The amounts received in excess of the par value are accumulated in the Additional Paid-in Capital from Common Stock account in the amount of $5,000 + $160,000, or $165,000. A portion of the equity section of the balance sheet just after the two stock issuances by La Cantina will reflect the Common Stock account stock issuances as shown in Figure 14.4. For instance, some businesses will issue stock in exchange for tangible assets or real property.
Issuing No-Par Value Stock
Most of the company will raise stock for the cash which is easy to manage, invest and use in the operation. The transaction will increase the cash balance base on the sale proceed. At the same time, it will increase the equity components which include common shares and additional paid-in capital. The issuance of common stock represents a form of ownership in a company. By buying common stock, shareholders become part-owners of the corporation and receive certain privileges.
This is due to when the company issue at a price that is higher than the par value or stated, the difference will be recorded as the additional paid-in capital account on the credit side of the journal entry. The sale of equity is one of the major financing activities for a business entity, and any cash that this activity brings into the business is categorized as such while drafting a statement of cash flows. The line items used for its reporting in the statement of cash flows are “issuance of common stock,” if the common shares are sold, and “issuance of preferred stock,” if the preferred shares are sold. In the balance sheet, treasury stock is reported as a contra account after retained earnings in the stockholders’ equity section.
The sale of preferred stock is accounted for using these same principles. A separate set of accounts should be used for the par value of preferred stock and any additional paid‐in‐capital in excess of par value for preferred stock. Preferred stock may have a call price, which is the amount the “issuing” company could pay to buy back the preferred stock at a specified future date. Assume Duratech’s net income for the first year was $3,100,000, and that the company has 12,500 shares of common stock issued. During May, the company’s board of directors authorizes the repurchase of 800 shares of the company’s own common stock as treasury stock. Each share of the company’s common stock is selling for $25 on the open market on May 1, the date that Duratech purchases the stock.
When it issues no-par stock with a stated value,
a company carries the shares in the capital stock account at the
stated value. Any amounts received in excess of the stated value
per share represent a part of the paid-in capital of the
corporation and the company credits them to Paid-In Capital in
Excess of Stated Value. The legal capital of a corporation issuing
no-par shares with a stated value is usually equal to the total
stated value of the shares issued. When it issues no-par stock with a stated value, a company carries the shares in the capital stock account at the stated value.
In some states,
the entire amount received for shares without par or stated value
is the amount of legal capital. When par value stock is issued at a premium, the assets received both cash or noncash assets are higher than the value of the common stock. For example, a cash receipt of $12 per share for common stock of $10 par value. The excess of $2 ($12 minus $10) is called a premium or capital contribution in excess of par value. To illustrate how the journal entry is, let’s assume that the total common stock issue is the same as above (50,000 shares). A $9,000 credit is reported to the cash account, as the company has paid back some of the cash that it has received from investors, while $9,000 is debited to the treasury stock account.
Keep in mind your journal entry must always
balance (total debits must equal total credits). Notice how the
accounting is the same for common and preferred stock. Keep in mind your journal entry must always balance (total debits must equal total credits). Notice how the accounting is the same for common and preferred stock. In this journal entry, the total expenses on the income statement and the total equity on the balance sheet increase by the same amount. The expense amount in this journal entry is the fair value of the service that the corporation receives in exchange for giving up the shares of the common stock.
