14 2: Analyze and Record Transactions for the Issuance and Repurchase of Stock Business LibreTexts

Treasury shares are included in the number reported for shares issued but are subtracted from issued shares to determine the number of outstanding shares. 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.

• According to the information provided, Kellogg has acquired nearly thirty-seven million treasury shares.
• If the total value exceeds the par or stated value of the stock issued, the value in excess of the par or stated value is added to the additional paid‐in‐capital (or paid‐in‐capital in excess of par) account.
• Additional paid-in capital can provide a significant part of a young company’s resources before earnings start accumulating through multiple profitable years.
• IssuedThe number of shares of a corporation that have been sold or conveyed to owners..
• 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.

There are two methods possible to
account for treasury stock—the cost method, which is discussed
here, and the par value method, which is a more advanced accounting
topic. The cost method is so named because the amount in the
Treasury Stock account at any point in time represents If Common Stock Is Issued For An Amount Greater Than Par Value the number
of shares held in treasury times the original cost paid to acquire
each treasury share. When a company issues stock for property or services, the
company increases the respective asset account with a debit and the
respective equity accounts with credits.

Terms Similar to Share Issuance at a Premium

Other than the use of two accounts to record the separate elements of the price at which a share is sold, there is no particular relevance to the concept of a premium. 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. The balance sheet number on paid-in capital may reflect transactions in common shares, preferred shares, treasury stock, or some combination of all of these.

DeWitt carries the $ 30,000 received over and above the stated value of  $200,000 permanently as paid-in capital because it is a part of the capital originally contributed by the stockholders. This number indicates the total amount of money that individual investors and institutional investors have staked on a company’s success. A mature company should have more earned capital than paid-in capital. Earned capital is an indication of the amount of money that a company is actually taking in for its goods and services. Companies may buy back shares from time to time in order to reduce the total number of their shares in circulation.

Types of Stock Affecting Paid-In Capital

Stock can be issued in exchange for cash, property, or services provided to the corporation. For example, an investor could give a delivery truck in exchange for a company’s stock. The general rule is to recognize the assets received in exchange for stock at the asset’s fair market value.

If corporations issue stock in exchange for assets or as payment for services rendered, a value must be assigned using the cost principle. The cost of an asset received in exchange for a corporation’s stock is the market value of the stock issued. If the stock’s market value is not yet determined (as would occur when a company is just starting), the fair market value of the assets or services received is used to value the transaction. If the total value exceeds the par or stated value of the stock issued, the value in excess of the par or stated value is added to the additional paid‐in‐capital (or paid‐in‐capital in excess of par) account. The entry to record this exchange would be based on the invoice value because the market value for the corporation’s stock has not yet been determined. Organization costs is an intangible asset, included on the balance sheet and amortized over some period not to exceed 40 years.

Issuing Preferred Stock

Each share of the company’s common stock is selling
for $25 on the open market on May 1, the date that Duratech
purchases the stock. Duratech will pay the market price of the
stock at $25 per share times the 800 shares it purchased, for a
total cost of $20,000. The following journal entry is recorded for
the purchase of the treasury stock under the cost method. When a company issues stock for property or services, the company increases the respective asset account with a debit and the respective equity accounts with credits.

Stockholders’ equity is affected only if the corporation issues additional stock or buys back its own stock. On the balance sheet, the par value of outstanding shares is recorded to common stock, and the excess (that is, the amount the market price adds to par value) is recorded to additional paid-in capital. For example, if company XYZ issues 1,000 shares of stock with a par value of $50, then the minimum amount of equity that should be generated by the sale of https://kelleysbookkeeping.com/gross-profit-vs-net-profit/ those shares is $50,000. Since the market value of the stock has virtually nothing to do with par value, investors may buy the stock on the open market for considerably less than $50. If all 1,000 shares are purchased below par, say for $30, the company will generate only $30,000 in equity. If the business goes under and cannot meet its financial obligations, shareholders could be held liable for the $20-per-share difference between par and the purchase price.

The corporation’s charter determines the par value printed on the stock certificates issued. Par value may be any amount—1 cent, 10 cents, 16 cents,  $ 1,  $5, or  $100. Investors value preferred stock shares for their steady returns, not for their price growth, which can be minimal. They appeal to fewer investors, which is why most companies have relatively few shares of preferred stock than common stock in circulation. When a public company wants to raise money, it may issue a round of common stock shares. It sells all of those shares to the public at par plus whatever value the market puts on it.

Additional paid-in capital can provide a significant part of a young company’s resources before earnings start accumulating through multiple profitable years. It is an important layer of defense against potential business losses if retained earnings show a deficit. 2Many other laws have been passed over the years that have been much more effective at protecting both creditors and stockholders. Paid-in capital may not be a headline number for a company, but it’s worth taking note of it as an investor.

The Preferred Stock account increases for the par value of the preferred stock, $8 times 1,000 shares, or $8,000. The excess of the issue price of $45 per share over the $8 par value, times the 1,000 shares, is credited as an increase to Additional Paid-in Capital from Preferred Stock, resulting in a credit of $37,000. To illustrate, say Company B issues 2,000 shares of common stock with a par value of $2 per share. Paid-in capital is the total amount paid by investors for common or preferred stock.

A portion
of the equity section of the balance sheet just after the two stock
issuances by La Cantina will reflect the Common Stock account stock
issuances as shown in
Figure 14.4. The fair market value of the land cannot be objectively determined as it relies on an individual’s opinion and therefore, the more objective stock price is used in valuing the land. Some of these terms have been examined previously, others have not. For example, “retained earnings” was described in early chapters as the increase in net assets generated by net income over the life of a company less any amounts distributed as dividends during that same period. In Chapter 12 “In a Set of Financial Statements, What Information Is Conveyed about Equity Investments? ”, “accumulated other comprehensive income” was discussed because it was utilized to record changes in the fair value of available-for-sale securities.