Stock may be issued for assets other than cash, such as services rendered, land, equipment, vehicles, accounts receivable, and inventory. In this case, the value of either the stock or the asset must be known. The assumption is that both the asset and the stock have the same value. A stock split is much like a large stock dividend in that both are large enough to cause a change in the market price of the stock. Additionally, the split indicates that share value has been increasing, suggesting growth is likely to continue and result in further increase in demand and value.
- 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.
- Shares issued is the number of shares a corporation has sold to stockholders for the first time.
- And the originally issued common stock was still $5 per share with the par value of $1 per share.
- 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.
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.
Accounting for a Stock Split
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. When a company has more than one class of stock, it usually keeps a separate additional paid-in capital account for each class. A small stock dividend occurs when a stock dividend distribution is less than 25% of the total outstanding shares based on the shares outstanding prior to the dividend distribution.
Companies often make the decision to split stock when the stock price has increased enough to be out of line with competitors, and the business wants to continue to offer shares at an attractive price for small investors. A traditional stock split occurs when a company’s board of directors issue new shares to existing shareholders in place of the old shares by increasing the number of shares and reducing the par value of each share. For example, in a 2-for-1 stock split, two shares of stock are distributed for each share held by a shareholder.
For example, on January 1, we hire an attorney to help in forming the corporation in which they charge us $8,000 for the service. However, instead of paying cash, we give the 1,000 shares of common stock to the attorney in exchange for the service instead. The measurement of the fair value of the service in the case of issuing the common stock for the services is the same as above. So, the fair value of the shares of the common stock given up will be used as the measurement if its market value is available. However, if the fair value of the shares of the common stock giving up cannot be determined, the fair value of the service expense will be used instead.
Example of issuing common stock for cash
To illustrate, assume that Duratech Corporation’s balance sheet at the end of its second year of operations shows the following in the stockholders’ equity section prior to the declaration of a large stock dividend. Note that dividends are distributed or paid only to shares of stock that are outstanding. Treasury shares are not outstanding, so no dividends are declared or distributed for these shares. Regardless of the type of dividend, the declaration always causes a decrease in the retained earnings account. In that situation, the entire amount received is entered in the common stock account. If this stock was not selling on a stock exchange, fair value might not be apparent.
Sale of Common Stock Journal Entry
Depending on the type of common stock, shareholders may also have the right to vote on major decisions and policies of the company. Some companies also issue non-voting common stock, which does not entitle the holder to vote, but still may be beneficial in terms of profits if the company performs well. For example, if 1,000 shares were issued at $25 per share, but an additional $5 was paid for each share as a service fee, then you would need to debit Service Fees for $5,000 and credit Cash for $25,000. For example, on July 1, we issue 1,000 shares of common stock at the value of $15 per share. For example, on January 1, as a corporation, we issue 10,000 shares of the common stock for $100,000. These 10,000 shares of the common stock have a par value of $1 per share.
After the distribution, the total stockholders’ equity remains the same as it was prior to the distribution. The amounts within the accounts are merely shifted from the earned capital account (Retained Earnings) to the contributed capital accounts (Common Stock and Additional Paid-in Capital). The difference is the 3,000 additional shares of the stock dividend distribution. The company https://www.wave-accounting.net/ still has the same total value of assets, so its value does not change at the time a stock distribution occurs. The increase in the number of outstanding shares does not dilute the value of the shares held by the existing shareholders. The market value of the original shares plus the newly issued shares is the same as the market value of the original shares before the stock dividend.
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. This journal entry will reduce the balance of the retained earnings towing invoice template by the different amount of market value and the par value of the common stock. And of course, the difference here is the result of the market value being lower than the par value, not the other way around.
They are not considered expenses, and they are not reported on the income statement. They are a distribution of the net income of a company and are not a cost of business operations. Common shares represent ownership in a company, and holders of common shares are entitled to a share of the company’s profits and assets. When a company issues common shares, it is effectively selling ownership stakes in the company to the investors who purchase the shares. Hence, we may come across the circumstance in which the common stock has no par value (e.i., no par value registered on the stock certificate).
Accounting for Cash Dividends When Only Common Stock Is Issued
The date of declaration is the date on which the dividends become a legal liability, the date on which the board of directors votes to distribute the dividends. Cash and property dividends become liabilities on the declaration date because they represent a formal obligation to distribute economic resources (assets) to stockholders. On the other hand, stock dividends distribute additional shares of stock, and because stock is part of equity and not an asset, stock dividends do not become liabilities when declared.
In this case, when we issue the common stock, we will need to record the entire amount of cash received to the common stock account without additional paid-in capital involved. It is useful to note that when the corporation has more than one type of stock, the additional paid-in capital account above should be broken down to identify which type of stock it belongs to. This is why we may see the account such as “paid-in capital in excess of par-common stock” instead of just “additional paid-in capital” in the journal entry for the issuance of common stock above.
The corporation’s charter determines the par value printed on the stock certificates issued. Par value may be any amount—1 cent, 10 cents, 16 cents, $ 1, $5, or $100. If you wish to charge more than your credit limit on a credit card, you may contact 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. 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.