Issuance of Shares of Stock Journal Entries Examples

This means that the outstanding value of common stock and the asset received are at the same value. In order to understand clearly this, let’s see the illustration of the journal entry for this kind of issuance of common stock. In this journal entry, as the company issues the small stock dividend (less stock issuance journal entry than 20%-25%), the market price of $5 per share is used to assign the value to the dividend. Hence, the value of stock dividend is $250,000 (500,000 x 10% x $5). Likewise, the common stock dividend distributable is $50,000 (500,000 x 10% x $1) as the common stock has a par value of $1 per share.

If the repurchase price is more than the original issue price, the difference is a decrease (debit) to the additional paid‐in‐capital—treasury stock account until its balance reaches zero. Once the balance in the additional paid‐in‐capital—treasury stock account reaches zero, or if there is no such account, the difference is a decrease (debit) to retained earnings. If the repurchase price is less than the original selling price, the difference increases (is credited to) the additional paid‐in‐capital account. When a company issues stock for property or services, the company increases the respective asset account with a debit and the respective equity accounts with credits. 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.

The number of shares issued cannot exceed the number of shares authorized. Shares authorized is the number of shares a corporation is allowed to issue (sell). For a large corporation, this is based on a decision by its Board of Directors, a group elected to represent and serve the interest of the stockholders. Authorization is just permission to sell shares of stock; no action has actually taken place yet. If this stock was not selling on a stock exchange, fair value might not be apparent. In that situation, the Maine Company should recognize the land at its own fair value of $125,000 with an accompanying $5,000 increase in the capital in excess of par value account.

In applying to the state government as part of the initial incorporation process, company officials indicate the maximum number of capital shares they want to be able to issue. Corporations often set this figure so high that they never have to worry about reaching it. However, states do allow the authorization to be raised if necessary.

  1. After some deliberations, the board of directors has decided to distribute a $1.00 cash dividend on each share of common stock.
  2. As discussed previously, dividend distributions reduce the amount reported as retained earnings but have no impact on reported net income.
  3. 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.
  4. When a company issues stock for property or services, the company increases the respective asset account with a debit and the respective equity accounts with credits.
  5. This is due to when the company issues the large stock dividend, the value assigned to the dividend is the par value of the common stock, not the market price.

However, the corporation does make a journal entry to record the issuance of a stock dividend although it creates no impact on either assets or liabilities. The retained earnings balance is decreased by the fair value of the shares issued while contributed capital (common stock and capital in excess of par value) are increased by the same amount. 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. If the Board of Directors decides to retire the treasury stock at the time it is repurchased, it is cancelled and no longer considered issued.

Examples of Journal Entries

And the $45,000 of the additional paid-in capital comes from the $50,000 amount which is the total market value of shares of common stock given up deducting the $5,000. Accounting for common stock is very critical ranging from the date of issue of common stock to dividend declared and paid. In the previous article, we covered the cost of comm stock equity calculation. In this article, we cover how to account for the issuance of common stock.

Everything You Need To Master Financial Modeling

As you can see from the journal entry above, the total common stock equal to the cash received from investor. 1As can be seen in this press release, the terms “stock dividend” and “stock split” have come to be virtually interchangeable to the public. However, minor legal differences do exist that actually impact reporting.

4: Issuing Stock for Non-Cash Assets

In this journal entry, the credit of the common stock is the entire proceeds we receive from issuing of the common stock. As the common stock has no par value, regardless of how high the market value is, there won’t be any additional paid-in capital involved here. For example, we issue 5,000 shares of common stock in our corporation to acquire a plot of land. These 1,000 shares of the common stock have a par value of $1 per share and a market value of $10 per share as of the issuing date. If you are a business owner, it is important to understand how to record common stock issued in your journal entries. Notice that the net increase to equity on the balance sheet at the exercise date is simply the amount of option proceeds.

Small stock dividend example

The common stock, sometimes, is issued for non-cash assets; for example in exchange for land or building, or sometimes in exchange for not paying organization expenses to the promoters. Such non-cash assets are then recorded at the market values as of the date of transactions. In some cases, the common stock can also be issued a no-par value at an assigned stated value. In this case, the stated value becomes the legal capital while the amount received in excess of the stated value is treated as contributed capital in excess of the stated value of the common stock. This contributed capital in excess of stated value is recorded and presented separately in the equity section of the balance sheet.

This contrasts with issuing par value shares or shares with a stated value. In some states, the entire amount received for shares without par or stated value is the amount of legal capital. The legal capital in this example would then be equal to $ 250,000. 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.

As you saw in the video, stock can be issued for cash or for other assets. When issuing capital stock for property or services, companies must determine the dollar amount of the exchange. Accountants generally record the transaction at the fair value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident. In the company as a corporation, we may issue the common stock for cash for expanding the business operation. Likewise, we need to make the journal entry for issuing the common stock in order to account for the increase in the capital section of the equity on the balance sheet. When a corporation issues common stock at par value, the amount of cash or non-cash assets received equal to the value of the common stock.

Journal Entries for Deferred Tax Assets and Liabilities

The journal entries to record the issuance of stocks depends on whether the shares have been issued at par value or not. To illustrate this, let’s assume that ABC Corporation issues1,000 shares of no par value common stock at $50 stated value for $60 cash per share. In this case, the company will just directly debit the retained earnings account in the entry of the stock dividend declared. Similar to the cash dividend, the company may not have the stock dividends account.

That is different from, for example, giving up an asset such as a truck in exchange for a computer or some other type of property. This journal entry will reduce the outstanding balance of the additional paid-in capital account from $100,000 to $80,000 as a result of issuing the 10,000 shares of the common stock below its par value. For example, on December 18, 2020, the company ABC declares a 10% stock dividend on its 500,000 shares of common stock.

Par value gives
the accountant a constant amount at which to record capital stock
issuances in the capital stock accounts. As stated earlier, the
total par value of all issued shares is generally the legal capital
of the corporation. Shares with a par value of  $5 have traded (sold) in the market for more than $600, and many  $100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued.