Journal entry for issuing common stock
Introduction
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.
Sometime, we may also issue the common stock for the non-cash transaction. This may include issuing common stock for the non-cash asset or issuing the stock in exchange for the service.
While issuing the common stock for the cash asset and the non-cash asset will increase the total assets for the impact on the balance sheet, the issuance of the common stock for service will increase the total expenses on the income statement instead.
In a corporation, the common stock is usually issued for a higher value than its par value. This is due to, in many jurisdictions, issuing the common stock at the price below the par value is prohibited; hence, the par value of the common stock that is printed on the paper stock certificate is usually a very small figure.
In this case, the journal entry for issuing the common stock will contain the additional paid-in capital account, in which it represents the difference between the market value of the common stock and its par value.
Of course, the par value of the common stock has nothing to do with its market value. And the real value of how much a company’s shares are actually worth and sold for is the market value, not the par value. The par value of the common stock nowadays is usually just the number on the paper.
Journal entry for issuing common stock for cash
We can make the journal entry for issuing common stock for cash by debiting the cash account and crediting the common stock account and the additional paid-in capital account.
Issuing at price higher than par value:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Common stock | 000 | |
| Additional paid-in capital | 000 |
In this journal entry, the additional paid-in capital account is the different amount between the market value and the par value of the common stock. In general, it is a result of issuing the common stock at a price that is higher than its par value.
Likewise, if we issue the common stock at par value there will be no additional paid-in capital in the record. In this case, we can make the journal entry for the issuance of common stock at par value with the debit of the cash account and the credit of the common stock account.
Issuing at par value:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Common stock | 000 |
The journal entry for issuing the common stock for cash will increase both total assets and total equity on the balance sheet.
Example of issuing common stock for cash
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.
In this case, we can make the journal entry for issuing the 10,000 shares of common stock for the $100,000 cash by debiting the $100,000 amount to the cash account and crediting the $10,000 to the common stock account and the $90,000 to the additional paid-in capital account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Common stock | 10,000 | |
| Additional paid-in capital | 90,000 |
This journal entry for issuing the common stock for the $100,000 cash will increase the total assets and total equity on the balance sheet by the same amount of $100,000 as of January 1.
Journal entry for issuing common stock for non-cash asset
As mentioned, we may issue the common stock in exchange for the non-cash asset, such as land, building or equipment, etc. instead of the cash asset.
In this case, we can make the journal entry for issuing the commons stock for the non-cash asset by debiting the non-cash asset account and crediting the common stock account and the additional paid-in capital account.
| Account | Debit | Credit |
|---|---|---|
| Non-cash asset | 000 | |
| Common stock | 000 | |
| Additional paid-in capital | 000 |
For issuing the common stock for the non-cash assets, such as land, building, equipment, etc., the value of the share price on the market is usually used as the cost of the non-cash asset in the exchange. However, if the share price is not available on the market, the cost of the non-cash asset will be used instead.
In general, the cost of the non-cash asset is either the fair value of the common stock given up or the fair value of the non-cash asset received. Of course, the fair value of the common stock is usually used if it is available since it is more reliable.
Example of issuing common stock for non-cash asset
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. And the acquired plot of land has an asking price of $60,000.
In this case, we will record the land in the balance sheet as $50,000 ($10,000 x 5,000 shares) even though the land was put on sale for a different price (e.i. $60,000). This is due to the due to the share price on the capital market is considered to be more reliable than the asking price of the land.
Likewise, we can make the journal entry for issuing the common stock for the non-cash asset which is a plot of land above by debiting the $50,000 amount to the land account and crediting the $5,000 to the common stock account and the remaining $45,000 to the additional paid-in capital account.
| Account | Debit | Credit |
|---|---|---|
| Land | 50,000 | |
| Common stock | 5,000 | |
| Additional paid-in capital | 45,000 |
The $5,000 of the common stock account in the journal entry comes from the 5,000 shares multiplying with the $1 per share of the par value. 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.
Journal entry for issuing common stock for service
In addition to the non-cash asset, we may also issue the common stock in exchange for the service instead. In this case, the debit side of the journal entry will be the expense amounting to the cost or the fair value of the service that needs to be charged to the income statement instead.
Hence, we can make the journal entry for issuance of the common stock in exchange for the service by debiting the expense account and crediting the common stock account and the additional paid-in capital account.
| Account | Debit | Credit |
|---|---|---|
| Expense | 000 | |
| Common stock | 000 | |
| Additional paid-in capital | 000 |
In this journal entry, the total expenses on the income statement and the total equity on the balance sheet increase by the same amount. The expense amount in this journal entry is the fair value of the service that the corporation receives in exchange for giving up the shares of the common stock.
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.
Issuing common stock for service example
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.
At the time of the formation of the corporation, the market value of our common stock cannot be determined yet. Though, the par value of the common stock is registered as $1 per share on the stock certificate.
In this case, we can make the journal entry for issuing the common stock for the service by debiting the $8,000 to the formation expense account and crediting the $1,000 to the common stock account and the $7,000 to the additional paid-in capital account as below:
| Account | Debit | Credit |
|---|---|---|
| Formation expense | 8,000 | |
| Common stock | 1,000 | |
| Additional paid-in capital | 7,000 |
In this journal entry, the fair value of the service received which is $8,000 is used as a measurement of the cost in the exchanging transaction since the market value of the common stock is not available at the time of exchange yet.
Journal entry for issuing common stock below par value
It is useful to note that in many jurisdictions, issuing the common stock below par value is not allowed and is considered illegal. Additionally, even though some jurisdictions allow the issuance of the common stock below its par value, such activity is usually very rare.
We can make the journal entry for issuing the common stock below the par value by debiting the additional paid-in capital account (if available) for the difference between cash received and the fair value of the common stock at par value as below:
Issuing common stock below par value with additional paid capital:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Additional paid-in capital | 000 | |
| Common stock | 000 |
In this journal entry, we can debit the additional paid-in capital account only if there is an available balance (the credit side). However, if there is no available balance in the additional paid-in capital account, we will need to debit the retained earnings account instead.
In this case, the journal entry for issuing the common stock below the par value will change to the debit of the cash account and the retained earnings account and the credit of the common stock account as below instead.
Issuing common stock below par value without additional paid-in capital:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Retained earnings | 000 | |
| Common stock | 000 |
This journal entry will reduce the balance of the retained earnings 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.
For example, the company XYZ issues the 10,000 shares of the common stock for $80,000. However, these 10,000 shares of the common stock have a par value of $10 per share. This means the company XYZ issues the common stock at a price of $8 per share ($80,000 / 10,000 shares) which is below its par value of $10 per share.
Assuming that the company XYZ still has a $100,000 outstanding balance of the additional paid-in capital account on the balance sheet before the issuance of these 10,000 shares of common stock.
In this case, the company XYZ can make the journal entry for issuing the common stock below its par value by debiting the different amount to the additional paid-in capital account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 80,000 | |
| Additional paid-in capital | 20,000 | |
| Common stock | 100,000 |
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.
Issuing no-par common stock
As mentioned, nowadays, par value has nothing to do with the market value of the common stock and it is just a number on the paper. Likewise, investors typically do not deem that the par value of the common stock is necessary to exist before they purchase the stock for their investments.
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). 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.
Likewise, we can make the journal entry for issuing the no-par common stock by debiting the cash account and crediting the common stock account.
No-par common stock:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Common stock | 000 |
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, on July 1, we issue 1,000 shares of common stock at the value of $15 per share. And these 1,000 shares of common stock have no par value.
In this case, we can make the journal entry for the issuance of these 1,000 of no-par common stock by debiting the $15,000, which is the proceeds we receive, to the cash account, and crediting the same amount to the common stock account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 15,000 | |
| Common stock | 15,000 |