The issuance of common stock involves the asset and equity accounts no matter if it was issued below, above or at par. To illustrate how these accounts are used differently in all three situations, we shall make the following journal entries:
Situation A: Issuance of 10,000 stocks at the par value of $10.
Cash 100,000
Common Stock 100,000
The journal entry is straightforward when stocks are issued at par. We just have to debit cash and credit the common stock account for the exact amount of cash received which is also equal to the par value of the stocks.
Situation B: Issuance of 10,000 stocks at $12 (par value of $10)
Cash 120,000
Common Stock 100,000
Additional Paid-in Capital 20,000
In this case, we issued stocks above the par value of $10. We simply debit the actual amount of cash received by the company, which is $120,000. We credit the common stock with the original par value of $10 to arrive at $100,000 and any amount in excess of that is credited to the Additional Paid-in Capital.
Situation C: Issuance of 10,000 stocks at $8 (pay value $10)
Cash 80,000
Discount on Capital Stock 20,000
Common Stock 100,00
In this case, we issued stocks below the par value of $10. Again, we debit cash with the actual amount received by the company, which is $80,000. We credit the common stock account with the original par value of $10 to arrive at $100,000 and any difference is debited to the Discount on Capital Stock account. In practice, the issuance of stocks at a discount rarely occurs because it is illegal in most states.
All these entries are reflected under the equity section of our balance sheet except for cash, which appears as an asset. After posting to our general ledgers and getting their final balances, our Stockholder’s Equity (Situation B) will look something like this:
Contributed Capital
Common Stock, $10 par value, 20,000 shares authorized,
10 shares issued and outstanding $100,000
Additional Paid-in Capital 20,000
Total Contributed Capital 120,000
Retained Earnings 0
Total Stockholders’ Equity $120,000
As for the case of the Discount on Capital Stock in Situation C, this will follow after the Common Stock account and appear as a deduction.
References:
- Albrecht, W., Stice, E., & Stice, J. (2007). Financial Accounting. Retrieved from [http://books.google.com.ph/books?id=Q62w4GPXMcAC]
- Needles, B., Power, M., & Crosson, S. (2008). Principles of Accounting. Retrieved from [http://books.google.com.ph/books?id=fOAKexV5AtUC]
- Stair, R., & Reynolds, G. (2014). Fundamentals of Information Systems (Seventh ed.). Retrieved from [http://books.google.com.ph/books?id=jRMLAAAAQBAJ]
