Shares of stock represent ownership in a corporation. A company meets its financing and capital needs by issuing stock to investors in return for cash. Common and preferred are the two classes of stock found in the equity section of a company's balance sheet. A company's stock may be held privately or held by the general public -- and therefore traded on a public stock exchange.
Recording the Issuance of Stock
Assume that on March 1, a privately held company issues 10,000 shares of common stock with a $10 par value for $13 cash per share, and 5,000 shares of preferred stock with a $12 par value for $14 per share. Record the issuance of both classes of stock to the company's general ledger.
Multiply the total number of shares issued to investors by the offer price of the share, then debit the account "cash" for the result. In the example, cash is debited by $130,000, the result of the $13 issue price per share x 10,000 shares issued.
Credit the balance sheet account "common stock" for the number of shares issued multiplied by the par value of the common stock. In the example, common stock should be credited for $100,000, the result of the 10,000 shares issued times the par value of $10 per share.
Credit the balance sheet account "additional paid-in capital" for the number of shares issued multiplied by the excess of the issue price over the par value of the stock. From the example, additional paid-in capital on the common stock is $30,000, the result of 10,000 shares issued multiplied by the excess of the issue price over the par value per share of $3
Ensure that your final journal entry to record the March 1 sale of common stock appears as follows:
Debit Cash 130,000 Credit Common Stock 100,000 Credit Additional Paid-in Capital 30,000
Record the issuance of preferred stock using the same procedures as outlined for issuing common stock. Check to ensure that your journal entry on March 1 appears as follows:
Debit Cash 70,000 Credit Preferred Stock 60,000 Credit Additional Paid-in Capital 10,000
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