Record the Sale of Preferred Stock
Overview
The company may need to raise funds through equity financing by selling the preferred stock. In this case, it needs to record the sale of preferred stock in the accounting record that will result in the increase of both total assets and total equity on the balance sheet.
The company usually raises funds through equity financing with the sale of preferred stock in order to avoid giving away the voting right to the shareholders that buy the stock. Though, there are cases that the company may also give a limited voting right to preferred stockholders with the specific agreement.
Record the sale of preferred stock
The company can record the sale of preferred stock with the journal entry by debiting the cash account and crediting the preferred stock account and additional paid-in capital account.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Preferred stock | 000 | |
| Additional paid-in capital – preferred stock | 000 |
In this journal entry, the additional paid-in capital account is the difference between the selling price and par value of the preferred stock. For example, if the selling price is $3 per share but the par value is only $1 per share, $2 will be credited to the additional paid-in capital account.
Sale of preferred stock example
For example, on Mar 01, the company ABC sells 50,000 preferred shares at the price of $5 per share. The company’s preferred stock has a par value of $1 per share in the record.
In this case, the company ABC can record the sale of preferred stock with the journal entry by debiting the $250,000 in the cash account and crediting the $50,000 in the preferred stock account while the difference goes to the additional paid-in capital account as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | 250,000 | |
| Preferred stock | 50,000 | |
| Additional paid-in capital – preferred stock | 200,000 |
The additional paid-in capital – preferred stock of $200,000 comes from the $250,000 (50,000 shares x $5 per share of selling price) minus the $50,000 (50,000 shares x $1 per share of par value). In this journal entry, both total assets and total equity increase by $250,000 on the balance sheet.
It is useful to note that if the company sells the preferred stock at the price of its par value, there won’t be any additional paid-in capital in the journal entry. In this case, the journal entry will become as below instead:
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Preferred stock | 000 |