When a company issues stock for cash, it’s a way to raise funds by selling ownership shares to investors. The journal entry for issuing stock for cash involves recording the receipt of cash and recognizing the increase in the company’s equity.
How to Record Journal Entry for Issuing Stock for Cash?
When a company issues stock for cash, it’s a way to raise funds by selling ownership shares to investors. The journal entry for issuing stock for cash involves recording the receipt of cash and recognizing the increase in the company’s equity. Here’s how you can journalize this transaction:
Example Journal Entry:
- Debit (Increase) Cash: This represents the cash received from investors.
- Credit (Increase) Common Stock: This represents the value of the shares issued, recorded at par value (the nominal value assigned to each share).
- Credit (Increase) Additional Paid-In Capital: This represents the amount received over and above the par value of the stock.
Formula for the entry:
- Debit Cash: Amount of cash received.
- Credit Common Stock: Number of shares issued multiplied by the par value per share.
- Credit Additional Paid-In Capital: The difference between the cash received and the par value of the shares issued.
Example:
Assume a company issues 1,000 shares of common stock with a par value of $1 per share at a price of $10 per share.
- Cash received: 1,000 shares × $10/share = $10,000
- Par value of shares issued: 1,000 shares × $1/share = $1,000
- Additional Paid-In Capital: $10,000 (cash received) – $1,000 (par value) = $9,000
Journal Entry:
| Date | Account | Debit | Credit |
|---|---|---|---|
| [Date] | Cash | $10,000 | |
| Common Stock | $1,000 | ||
| Additional Paid-In Capital | $9,000 |
This entry reflects the increase in cash, the issuance of stock at par value, and the additional paid-in capital.
Issuing Stock Above Par Value
If the stock is issued at a price above its par value, you need to record both the par value of the shares and the excess amount received over the par value as additional paid-in capital.
Example:
- Number of shares issued: 1,000
- Par value per share: $1
- Issue price per share: $10
Cash Received: 1,000 shares × $10/share = $10,000
Par Value of Shares: 1,000 shares × $1/share = $1,000
Additional Paid-In Capital: $10,000 (cash) – $1,000 (par value) = $9,000
Journal Entry:
| Date | Account | Debit | Credit |
|---|---|---|---|
| [Date] | Cash | $10,000 | |
| Common Stock | $1,000 | ||
| Additional Paid-In Capital | $9,000 |
Issuing Stock at Par Value
If the stock is issued at its par value, the journal entry is simpler because there is no additional paid-in capital.
Example:
- Number of shares issued: 500
- Par value per share: $5
- Issue price per share: $5
Cash Received: 500 shares × $5/share = $2,500
Par Value of Shares: 500 shares × $5/share = $2,500
Journal Entry:
| Date | Account | Debit | Credit |
|---|---|---|---|
| [Date] | Cash | $2,500 | |
| Common Stock | $2,500 |
Issuing Stock Below Par Value
Issuing stock below par value is generally prohibited or restricted in many jurisdictions because it can create a legal liability for the company. If allowed, the transaction would require adjustments, and often the difference between the par value and issue price would need to be accounted for in a special manner, such as a discount on stock issuance or other adjustments.
In summary, the main points are:
- Debit Cash for the total cash received.
- Credit Common Stock for the total par value of the shares issued.
- Credit Additional Paid-In Capital for any amount received over the par value.
By understanding these scenarios and considerations, you’ll be better equipped to handle stock issuance transactions and ensure accurate financial reporting.
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