Accounting for Common Stock
Common Stock or Common Share is the company equity instrument that represents corporation ownership. The company listed on the stock exchange and sell the ownership to the investors to raise the capital. The company wants to raise cash to pay off debt, expand the operation, acquire other company and support daily activities.
The common stockholders are the owner of the company and they have the right to vote for the company director, board, and request for change in the management team. It means the stockholder has the right to control and change the company structure and policy.
Common stockholder will receive dividend when the company making good profit with the approval from board of director. Besides the dividend, the common shareholders can gain from the investment when the share price increase. They will be entitled to receive company assets in the event of liquidation after all creditors are settled.
Issue Common Stock
Issue common stock is the process of selling the stock to the capital market. Only listed company can issue stock to the capital market and the investor will be able to purchase the share.
Issue Common Stock for Cash
Most of the time, company issue the common stock for cash and use it for other purposes. Investors simply purchase the stock from the issuer and gain ownership over the company’s share.
The common stock can be issued with par value and without par value.
Par Value or Face Value or nominal value is the value state on the share or bond. Common Share par value is the legal value state in the company article of memorandum. It is the amount state on the share certificate. Total stock par value is the amount that protects the corporate creditor in the case of liquidation. The shareholders are not allowed to withdraw the total capital from the company. It can be used only in the process of liquidation. It has nothing to do with the market price of the company share.
The company will be liable to the shareholders in case of the market price fall below par value.
Par Value Stock
It is very common that company issue stock with par value. It is the lowest amount that the company can sell the stock for. Most of the case, company sell stock over par value. The difference between issuance price and par value is recorded as Additional Paid-In Capital.
Issue Common Stock for Cash with Par Value Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Cash/Receivable | 000 | |
| Common Stock | 000 | |
| Additional Paid-In Capital | 000 |
Example
For example, Company ABC issues 100,000 shares to the capital market with a par value of $1 per share. As the company is making a good profit, the investors really interest in purchase the share. The share is able to sell at $ 100 per share. Please prepare the journal entry for the stock issue.
Cash receive from issuing common stock = 100,000 share * $ 100 per share = $ 10,000,000
Common Stock = 100,000 share * $ 1 per share = $ 100,000
Additional Paid-in-Capital = 100,000 shares * ($ 100 – $ 1) = $ 9,900,000
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,000,000 | |
| Common Stock | 100,000 | |
| Additional Paid-In Capital | 9,900,000 |
Non-Par Value Stock
No par value stock is the share that issue to the market without stating its par value on the certificate. When the share has no par value, all the issuance prices will be recorded into the common stock.
Issue Common Stock for Cash with No Par Value Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Cash/Receivable | 000 | |
| Common Stock | 000 |
Issue Common Stock for Non-Cash
The company can issue the stock for assets other than cash and service. The assets may include land, building, machine, vehicle, and other non-cash assets. The services included legal consultant, financial consulting, advisory, and so on.
Different from issuance for cash, the issue of stock for non-cash requires the company to define the market value of both stock and noncash assets. The issuance price will depend on one of the market values if it is more reliable. In most cases, the stock market value is more reliable as they trade in the capital market with many buyers and sellers. Unless the stock market value is not available, then asset fair value will be use.
The company needs to record the assets value, common stock, and additional paid-in capital, which is the same as the stock issue for cash. However, the transaction amount depends on assets market value or common stock market value whichever can be measured more reliability.
| Account | Debit | Credit |
|---|---|---|
| Assets | 000 | |
| Common Stock | 000 | |
| Additional Paid-In Capital | 000 |
We usually use the company stock market value to record the transaction. But if the stock market value is not available, we can use the asset’s fair value. If assets fair value also not available, management can determine the assets or service value.
Example
Company P issue 10,000 shares of its $ 1 par value common stock in exchange for the building. The building has a book value of $ 1.3 million but the owner claims that the fair value of the building is $ 1.5 million which base on the internal evaluation team. Company P share is trading at $ 100 per share in the capital market. Please record the transaction into the financial statement.
Asset value = 10,000 share * $ 100 per share = $ 1,000,000
Building value based on share’s market price as it is the price quote from capital market. It is more reliable than the evaluation.
Common Stock = 10,000 share * $ 1 per share = $ 10,000
Additional Paid-in Capital = $ 1,000,000 – 10,000 = $ 990,000
| Account | Debit | Credit |
|---|---|---|
| Building | 1,000,000 | |
| Common Stock | 10,000 | |
| Additional Paid-In Capital | 990,000 |
Note: If the market value of the share is not available due to any reasons, we can use the building market value by comparing it to a similar asset. If the building market value also not available, company can do an internal evaluation to determining asset value.
Common Stock Buyback (Treasury Stock)
A stock buyback or share buyback is the process that company decides to purchase its own stock from the capital market. The company may want to increase the share price by increase the demand by buying them back. The share buyback will retain in the company for a future issues, employee compensation, or retirement.
The common stock that company buyback from the market is recorded as treasury stock in the balance sheet. It is the negative balance report in the equity section in the balance sheet. It will reduce the common stock balance.
Common Stock Buyback Journal Entry:
| Account | Debit | Credit |
|---|---|---|
| Treasury Stock | 000 | |
| Cash | 000 |
Resale the Treasury Stock (stock buyback)
The common stock will be classified as treasury stock after the company’s buyback from the market. The company can reissue the treasury stock to the market.
The company needs to record cash consideration and reverse the treasury stock. If the cash consideration more than treasury stock, we need to record additional paid-in capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Treasury Stock | 000 | |
| Additional Paid-In Capital | 000 |
Resale of Treasury Stock below purchase price
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Additional Paid-In Capital | 000 | |
| Retained Earning* | 000 | |
| Treasury Stock | 000 |
Retained earnings will be recorded if the additional Paid-in-Capital balance is lower than the difference between cash receive and treasury stock balance.
Example
Company ZZZ issues 100,000 shares of $ 1 par value common stock into the market for $ 100 per share.
- At the end of 2nd year, management decides to purchase back 50,000 shares at $ 110 per share.
- At the end of 3rd year, management decides to resale the 20,000 shares of buyback stock (treasury stock) for $ 120 per share.
- At the end of 4th year, management decide to resale 25,000 shares of treasury stock for $ 105 per share
- At the end of 5th year, management decides to retire the remaining 5,000 shares.
ZZZ will make the following journal entries:
- Initial recording for the stock issue: Company issue 100,000 share at $ 100 per share
Cash receive from issue stock = 100,000 * 100 per share = $ 10,000,000
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,000,000 | |
| Common Stock | 10,000,000 |
- At the end of 2nd year, ZZZ buyback 50,000 shares from the market at $ 110 per share.
The company spends $ 5.5 million to purchase the shares and keep them on the balance sheet.
| Account | Debit | Credit |
|---|---|---|
| Treasury Stock | 5,500,000 | |
| Cash | 5,500,000 |
- At the end of 3rd year, Company resale the stock back to the market at $ 120 per share.
The company is able to sell the stock back at a higher price when it buyback. So the company needs to record more additional paid-in-capital into the balance sheet.
Cash receive = 20,000 shares * $ 120 per share = $2,400,000
Treasury Stock = 20,000 share * $ 110 = $ 2,200,000
Treasury stock deduct only $ 2.2 million because it depend on the buyback price ($ 110 per share)
Additional Paid-In-Capital = 2,400,000 – 2,200,000 = 200,000
| Account | Debit | Credit |
|---|---|---|
| Cash | 2,400,000 | |
| Treasury Stock | 2,200,000 | |
| Additional Paid In Capital | 200,000 |
- At the end of 4th year, company resale 25,000 treasury shares at $ 105 per share.
Cash receive = 25,000 shares * 105 per share = $ 2,625,000
Treasury Stock = 25,000 shares * $ 110 = $ 2,750,000
Additional Paid-In-Capital = 2,750,000 – 2,625,000 = $ 125,000
| Account | Debit | Credit |
|---|---|---|
| Cash | 2,625,000 | |
| Additional Paid-In Capital | 125,000 | |
| Treasury Stock | 2,750,000 |
- At the end of 5th year, company retire the remaining 5,000 share
| Account | Debit | Credit |
|---|---|---|
| Common Stock | 5,000 | |
| Additional Paid-In Capital | 545,000 | |
| Treasury Stock | 550,000 |
Retire of Treasury Stock
Management may decide to retire treasury stock in balance sheet. It means the company completely remove the stock.
The company can retire stock by buyback the outstanding stock from the market. So it means they need to record the common stock to treasury stock before retiring the stock.
The company needs to reverse the treasury stock with common stock and additional paid-in capital.
| Account | Debit | Credit |
|---|---|---|
| Common Stock | 000 | |
| Treasury Stock | 000 | |
| Additional Paid-In Capital | 000 |
Stock Split
Stock split is the process of dividing the current share number into multiple new shares to boost the stock liquidity. The company simply increase the number of outstanding share by a specific time and keep the total dollar value of share the same. Price per share will decrease align with the number of share increases.
The most common form of a stock split is 2-for-1 or 3-for-1, it means one share will be split into 2 or 3 share while the price of two or three share equal to one share before split.
Authorized Share
Authorized share is the number of shares state in the company incorporation of the article. It represents the maximum share that the company able to issue in the future. However, it does not mean that company needs to issue all the authorized shares.
The company usually sets an authorized share higher than their current need. So they are able to issue more shares when it is necessary.
Share Issued
Issued Shares are the number of shares that company sells to investors. They are the authorized shares that sold to the investors in the market. The company issue share to raise capital from the investors. They will receive cash as the number of shares are sold to the investor. Moreover, the company may issue a share to acquire another company by giving the business owner share equity.
Outstanding Share
Outstanding shares are the total number of shares that the company issue to the market. It excludes the share that the company buyback from the market. It equals the company’s share issue less the treasury stock.
The number of shares outstanding always equal to or less than the number of shares issued. The share issued is equal to or less than the number of authorized shares.
Conclusion
Company can raise money to expand the business and continue operation by issuing common stock to the investors. It is very common for the company in current globalization. A group of investors is not able to raise enough money to operate business in a big scale, so they need to raise more capital from the market with thousands of investors.