When a company issues stock for non-cash consideration, such as assets or services, the journal entry must reflect the value of the assets or services received in exchange for the stock.
How to Record Journal Entry for Issuing Stock for Non-Cash?
When a company issues stock for non-cash consideration, such as assets or services, the journal entry must reflect the value of the assets or services received in exchange for the stock. Here’s how to record these transactions:
General Principles
- Record the Fair Value of the Non-Cash Consideration: The value of the asset or service received is used to measure the transaction.
- Credit Common Stock: This reflects the par value of the shares issued.
- Credit Additional Paid-In Capital: This accounts for the excess of the fair value over the par value of the shares issued.
Example Scenarios
1. Issuing Stock for Property
Scenario:
- Number of shares issued: 1,000
- Par value per share: $1
- Fair value of the property received: $20,000
Calculations:
- Total Par Value of Shares: 1,000 shares × $1/share = $1,000
- Additional Paid-In Capital: $20,000 (fair value) – $1,000 (par value) = $19,000
Journal Entry:
| Date | Account | Debit | Credit |
|---|---|---|---|
| [Date] | Property (or Asset) | $20,000 | |
| Common Stock | $1,000 | ||
| Additional Paid-In Capital | $19,000 |
2. Issuing Stock for Services
Scenario:
- Number of shares issued: 500
- Par value per share: $1
- Fair value of the services received: $7,500
Calculations:
- Total Par Value of Shares: 500 shares × $1/share = $500
- Additional Paid-In Capital: $7,500 (fair value) – $500 (par value) = $7,000
Journal Entry:
| Date | Account | Debit | Credit |
|---|---|---|---|
| [Date] | Services Expense (or similar) | $7,500 | |
| Common Stock | $500 | ||
| Additional Paid-In Capital | $7,000 |
3. Issuing Stock for Inventory
Scenario:
- Number of shares issued: 2,000
- Par value per share: $0.50
- Fair value of the inventory received: $6,000
Calculations:
- Total Par Value of Shares: 2,000 shares × $0.50/share = $1,000
- Additional Paid-In Capital: $6,000 (fair value) – $1,000 (par value) = $5,000
Journal Entry:
| Date | Account | Debit | Credit |
|---|---|---|---|
| [Date] | Inventory | $6,000 | |
| Common Stock | $1,000 | ||
| Additional Paid-In Capital | $5,000 |
Additional Considerations
- Valuation: The fair value of the non-cash consideration should be based on reliable estimates and market values. In some cases, if the fair value of the non-cash consideration is not readily determinable, the company might use the fair value of the shares issued instead.
- Documentation: Proper documentation and justification for the valuation of the non-cash consideration should be maintained, including contracts, appraisals, and agreements.
- Disclosure: Adequate disclosure in the financial statements is necessary to explain the nature and amount of the non-cash consideration and the impact on equity.
These entries ensure that the stock issuance is accurately reflected in the company’s financial statements and that all equity accounts are correctly updated.
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