Issuance of Shares of Stock

When companies need more capital, they issue new shares to investers. Usually, the shares are issued in exchange of cash or cash equivalants but they may be issued in exchange of other assets such as property, plant and equipment. The investor receives share certificates as evidance of contribution towards the capital of the company.

The journal entries to record the issuance of stocks depends on whether the shares have been issued at par value or not.

Issuance of Par Value Stock

Par value shares are those which have a face value assigned to them. Such shares may be issued at par, above par or below par.

When par value shares are issued exactly at par, cash is debited and common stock or preferred stock account is credited.

In case of issuance above par, cash account is debited for the total cash received by the company, common stock or preferred stock is credited for the par value multiplied by number shares issued and additional paid-in capital account is credited for the excess of cash received over the par value mulitplied by number of shares issued.

When par value shares are issued below par, cash is debited for the actual amount recieved, common stock or preferred stock is credited for the total par value and discount on capital is debited for the excess of total par value over cash recieved. The discount on capital is part of shareholders' equity and it appears as a deduction from other equity accounts on balance sheet.

Issuance of No Par Stock

Issuance of shares having no par value is recorded by debiting cash and crediting common stock or prefered stock. However if board of directors of the company assigns a value to shares orally, such value is called stated value and the journal entries will be similar to par value stock.

Example

A company received $34,000 for issuing 10,000 shares of common stock of $3 par value. Pass the journal entry to record the issuance of shares.

Journal Entry

Cash34,000
Common Stock30,000
Additional Paid-In Capital4,000

Written by Irfanullah Jan