Par value may be any amount—1 cent, 10 cents, 16 cents, $ 1, $5, or $100. Common shares without par value are journalized by debiting cash (asset) for the amount received for the shares and crediting common shares (equity) for the same amount. Common shares represent an asset to the holder of the shares (the owner of the common shares) and are classified as equity on the corporation which issued the common shares. The “sacrifice” made by the Maine Company to acquire this land is $120,000 ($12 per share × 10,000 shares). Those shares could have been sold on the stock exchange to raise that much money. Instead, Maine issues them directly in exchange for the land and records the transaction as follows.
The legal capital of a corporation issuing no-par shares with a stated value is usually equal to the total stated value of the shares issued. This total reflects the assets conveyed to the business in exchange for capital stock. For Kellogg, that figure is $543 million, the amount received from its owners since operations first began.
Issue Stated Value Common Stock
However, Kellogg communicates additional information about its common stock such as the number of authorized and issued shares as well as its par value. That seems the logical first step in analyzing the information provided by a company about its capital shares. 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.
The shares are currently selling on a stock exchange for $12 each. The investor decides to accept this proposal rather than go to the trouble of trying to sell the land. Common stock has also been mentioned in connection with the capital contributed to a company by its owners.
- However, states do allow the authorization to be raised if necessary.
- The shares are currently selling on a stock exchange for $12 each.
- If this stock was not selling on a stock exchange, fair value might not be apparent.
- Par value may be any amount—1 cent, 10 cents, 16 cents, $ 1, $5, or $100.
When a company raises capital from investors, it does so by issuing securities, which are financial instruments that represent ownership in the company or the right to receive a future financial benefit. Common shares are one type of security that companies may issue to raise capital. The most mysterious term on a set of financial statements might well be “par value.” The requirement for a par value to be set was created decades ago in connection with the issuance of stock.
If the company sells the shares for more than the par value, then you would credit APIC. IF the company sells the shares for less than the par value, then you would debit APIC. 5As mentioned earlier, the issuance of capital stock is not viewed as a trade by the corporation because it merely increases the number of capital shares outstanding. That is different from, for example, giving up an asset such as a truck in exchange for a computer or some other type of property. To illustrate, assume that a potential investor is willing to convey land with a fair value of $125,000 to the Maine Company in exchange for an ownership interest. During negotiations, officials for Maine offer to issue ten thousand shares of $1 par value common stock for this property.
Journal entry for the issuance of common shares with par value
If issued for an asset or service instead of cash, the recording is based on the fair value of the shares given up. However, if that value is not available, the fair value of the asset or service is used. Shares with a par value of $5 have traded (sold) in the market for more than $600, and many $100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws permit. Par value gives the accountant a constant amount at which to record capital stock issuances in the capital stock accounts.
As stated earlier, the total par value of all issued shares is generally the legal capital of the corporation. When it issues no-par stock with a stated value, a company carries the shares in the capital stock account at the stated value. Any amounts received in excess of the stated value per share represent a part of the paid-in capital of the corporation and the company credits them to Paid-In Capital in Excess of Stated Value.
The remaining unissued shares are still available if the company needs to raise money by selling additional capital stock. Selling common shares to investors is a common method for companies to raise capital. This capital is used by the company to fund operations, invest in assets, and pay salaries. When a company issues common shares, it is selling ownership in the company to investors in exchange for cash. These investors then become shareholders, and their ownership stake in the company is based on the percentage of shares they hold. Issuing share capital allows companies to raise the funds they need to grow and develop.
It is printed on the face of a stock certificate and indicates (again depending on state law) the minimum amount of money that owners must legally leave in the business. In applying to the state government as part of the initial incorporation process, company officials indicate the maximum number of capital shares they want to be able to issue. Corporations often set this figure so high that they never have to worry about reaching it. However, states do allow the authorization to be raised if necessary. Each share of common or preferred capital stock either has a par value or lacks one. The corporation’s charter determines the par value printed on the stock certificates issued.
Chapter 14: Common And Preferred Stock
Since the company may issue shares at different times and at differing amounts, its credits to the capital stock account are not uniform amounts per share. This contrasts with issuing par value shares or shares with a stated value. In some states, the entire amount received for shares without par or stated value is the amount of legal capital. The legal capital in this example would then be equal to $ 250,000. The number of issued shares is simply the quantity that has been sold or otherwise conveyed to owners. Kellogg reports that one billion shares of common stock were authorized by the state of Delaware but only about 419 million have actually been issued to stockholders as of the balance sheet date.
As you saw in the video, stock can be issued for cash or for other assets. When issuing capital stock for property or services, companies must determine the dollar amount of the exchange. Accountants generally record the transaction at the fair value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident. A company issues common stock to raise money, so the debit will always be to cash. There will always be a credit to common stock for the # of shares issued x the par value.
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. In that situation, the Maine Company should recognize the land at its own fair value of $125,000 with an accompanying $5,000 increase in the capital in excess of par value account. Keep in mind your journal entry must always balance (total debits must equal total credits). Watch this video to demonstrate par and no-par value transactions. Notice how the accounting is the same for common and preferred stock.
What is common stock?
The total amount of stock currently in the hands of the public is referred to as the shares “outstanding.” Shares are sometimes bought back from stockholders and recorded as treasury stock. According to the information provided, Kellogg has acquired nearly thirty-seven million treasury shares. Although not mentioned directly, Kellogg now has only 382 million shares of common stock outstanding in the hands of the stockholders (419 million issued less 37 million treasury shares). This number is important because it serves as the basis for dividend payments as well as any votes taken of the stockholders. When a company issues new common shares from treasury, it means that the company is creating and selling new shares that have not previously been outstanding. Treasury shares are authorized but not currently owned by anyone, so they are effectively “new” shares that the company is creating and selling to raise capital.
Gains and losses in the worth of these investments were not included within net income. Rather, they were reported under this heading within stockholders’ equity and subsequently used in computing comprehensive income. 4As mentioned in the previous chapter, the sales of capital stock that occur on the New York Stock Exchange or other stock markets are between investors and have no direct effect on the company. Kellogg records the issuance of a share of $0.25 par value common stock for $46 in cash as follows3. Traditionally, companies have gotten around this limitation by setting the par value at an extremely low number2. For example, Kellogg discloses a par value of $0.25 for its common stock, which is actually quite high.
Common stock forms the basic ownership units of most corporations. The rights of the holders of common stock shares are normally set by state law but include voting for a board of directors to oversee current operations and future plans. Financial statements often indicate the number of authorized shares (the maximum allowed), issued shares (the number that have been sold), and outstanding shares (those currently in the hands of owners). Common stock usually has a par value although the meaning of this number has faded in importance over the decades. Upon issuance, common stock is recorded at par value with any amount received above that figure reported in an account such as capital in excess of par value.
