Accounting: The Language of Business (Part 76)

A healthy corporation acts on the interests of its stakeholders and customers.

Ari Melber

Corporations: Organization, Capital Stock Transactions, and Dividends (Part D) 

by

Charles Lamson

Issuing Stock

Recall from (part 75) that when only one class of stock is issued, it is called common stock. In this case, each share of common stock has equal rights. To appeal to a broader investment market, a corporation may issue one or more classes of stock with various preference rights. A common example of such a right is the preference to dividends. Such a stock is generally called a preferred stock. 

Bearing that in mind, a separate account is used for recording the amount of each class of stock issued to investors in a corporation. For example, assume that a corporation is authorized to issue 10,000 shares of preferred stock, $100 par (Shares of stock are often assigned a monetary amount, called par.), and 100,000 shares of common stock, $20 par. One half of each class of authorized shares is issued at par for cash. The corporation's journal entry (see part 10) to record the stock issued is as follows:

Stock is often issued by a corporation at a price other than its par. This is because the par value of a stock is simply its legal capital. The price at which stock can be sold by a corporation depends on a variety of factors, such as:

1. The financial condition, earnings record, and dividend record of the corporation.

2. Investor expectations of the corporation's potential earning power.

3. General business and economic conditions and prospects.

When stock is issued for a price that is more than its par, the stock is sold at a premium. When stock is issued for a price that is less than its par, the stock is sold at a discount. Thus, if stock with a par of $50 is issued for a price of $60 the stock has sold at a premium of $10. If the same stock is issued at a price of $45, the stocki has sold at a discount of $5. Many states do not permit stock to be issued at a discount. In others, it may be done only under unusual conditions. Since issuing stock at a discount is rare, it is not illustrated.

A corporation issuing stock must maintain records of the stockholders in order to issue dividend checks and distribute the financial statements in other reports. Large public corporations normally use a financial institution, such as a bank, for this purpose. In such cases, the financial institution is referred to as a transfer agent or registrar. For example, the transfer agent and registrar for Coca-Cola Enterprises is First Chicago Trust Company of New York.

Premium on Stock

When stock is issued at a premium, cash or other asset accounts are debited for the amount received. Common stock or preferred stock is then credited for the par amount. The excess of the amount paid over par is a part of the total investment of the stockholders in the corporation. Therefore, such an amount in excess of par should be classified as a part of the paid-in capital. An account entitled Paid-in Capital in Excess of Par is usually credited for this amount.

To illustrate, assume that Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55. The entry to record this transaction is as follows:

When a stock is issued in exchange for assets other than cash, such as land, buildings, and equipment, the assets acquired should be recorded at their fair market value. If this value cannot be objectiviely determined, the fair market price of the stock issued may be used.

To illustrate, assume that a corporation acquired land for which the fair market value cannot be determined. In exchange the corporation issued 10,000 shares of its $10 par common. Assuming that the stock has a current market price of $12 per share, this transaction is recorded as follows:

No-Par Stock

In most states, both preferred and common stock may be issued without a par value. When no-par stock is issued, the entire proceeds are credited to the stock account. This is true even though the issue price varies from time to time. For example, assume that a corporation issues $10,000 of no-par common stock at $40 a share and at a later date issues 1,000 additional shares at $36. The entries to record the no par-stock are as follows:

Some states require that the entire proceeds from the issue of no-par stock be recorded as legal capital. In this case, the preceding entries would be proper. In other states, no par-stock may be assigned a stated value per share. The stated value is recorded like a par value, and the excess of the proceeds over the stated value is recorded as follows: 

^WAAREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 488-491*

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