A corporation has the ability to issue common stock or preferred stock as a way of raising capital for the business. Unlike preferred stockholders, common stockholders can vote on mergers and elect board members, as explained by the Accounting Coach website. A corporation may issue common stock to company insiders, employees and investors. A company can issue common stock in exchange for cash and other assets. Par value indicates the minimum selling price of the common stock shares. A company may issue common stock above the par value, which results in additional paid-in capital.
1. Confirm the date on which the company issued common stock. Write the day and month of the common stock issuance in the general journal.
2. Verify the issue price of the common stock. Multiply the number of shares issued by the purchase price per share to determine the price paid for the common stock issuance. For example, if a company sells 1,000 shares of $1 par value stock at $8 per share, the issue price of the common stock is $8,000, since $8 per share multiplied by 1,000 shares equals $8,000.
3. Debit an asset account for the issue price of the common stock. For instance, a company that received $8,000 cash for common stock issuance must debit cash for $8,000. If a company received another asset as opposed to cash, debit the asset account for $8,000. For example, a company that received land in exchange for common stock issuance must debit land for $8,000. This entry shows an increase in an asset as a result of issuing common stock.
4. Draft a credit in the common stock account. If the par value of the common stock $1, multiply 1,000 shares times $1, which results in $1,000 . Write a $1,000 credit to common stock.This entry establishes the par value of the common stock issue. The credit to common stock shows an increase in common stockholders' equity
5. Record a credit in the additional paid-in capital account. Crediting the additional paid-in capital account shows that the company received more than par value for the common stock issuance. Subtract par value common stock issue by the common stock bond issuance price, which indicates the amount of additional paid-in capital. Let's assume a company has a par value common stock price of $1,000, but the common stock issue price equals $8,000. In this scenario, the company has $7,000 of additional paid-in capital. This means the company must write a $7,000 credit in the additional paid-in capital account to make the transaction balance.
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