Accounting for Stock Issue

ACCOUNTING FOR STOCK ISSUE

Let’s first review the rules of debits and credits by working with the accounting equation (Assets = Liabilities + Stockholders’ Equity OR CAPITAL). Assets are increased with debits and decreased with credits.

Liabilities are increased with credits and decreased with debits.

Stockholders’ Equity consists of several accounts:

Common Stock, Retained Earnings, and Revenues all increase Stockholders’ Equity and are increased with credits. Expenses and Dividends are overall decreases to Stockholders’ Equity and are increased with debits.

Account / Increase / Decrease
Common Stock / Cr / Dr
Retained Earnings / Cr / Dr
Revenues / Cr / Dr
Expenses / Dr / Cr
Dividends / Dr / Cr

Journal entry for applicants offer for shares issued at par:

Debit- BankCredit- Ordinary share applicant

Journal entry for company’s acceptance of applicants offer for shares issued at par:

Debit- Ordinary share applicant Credit- Ordinary /preference share capital

Journal entry for applicants offer for shares issued at premium:

Debit- BankCredit- Ordinary/preference share applicant

Journal entry for company’s acceptance of applicants offer for shares issued at premium:

Debit- Ordinary/preference share applicant (nominal value)

Credit- Ordinary/preference share capital

Debit: Ordinary share applicant (share premium)

Credit: share premium

Journal entry for oversubscription of shares:

Debit- BankCredit- Ordinary share applicant

Debit: Ordinary share applicant (refund)Credit: Bank

Debit- Ordinary share applicant (nominal value) Credit- Ordinary/preference share capital

Journal entry for issue of shares payable by installments:

Application:

Debit: Bank Credit: Application and allotment account

Debit: Application and allotment account (nominal at installment

Credit: Share capital account

Refund of application:

Debit: Application and allotment (installment rate) Credit: Bank-refund of application

Allotment:

Debit: Bank (less excess application monies)Credit: Application and allotment account

1st call:

Debit: Bank (installment rate)Credit: First call

Debit: First callCredit: Share capital account

2nd call:

Debit: Bank (installment rate)Credit: Second call

Debit: Second callCredit: Share capital account

Question solution:

Shark School Supply Corporation was organized in 2011. It was authorized to issue 200,000 shares of no-par common stock with a states value of $5 per share, and 40,000 shares of $100 par value, 6% noncumulative preferred stock. On March 1, the company issued 60,000 shares of its common stock for $15 per share and 8,000 shares of its preferred stock for $100 per share.

1. Record the issuance of the stock in T accounts

Notes:

• Issuance of shares with no par value is recorded by:
• Debit cash and credit common stock or preferred stock.
• When par value shares are issued exactly at par:
• Cash is debited and common stock or preferred stock account is credited.
• When the issuance of stock is above par, the entry is:
• Debit cash account for the total cash received
• common stock or preferred stock is credited for the par value * number shares issued
• additional paid-in capital account is credited for the excess of cash received (over the par value * number of shares issued)
• Issuance of shares below par, the entry is:
• Debit cash for the actual amount received
• Credit common stock or preferred stock is for the total par value
• Debit discount on capital for the excess of total par value over cash received

2. Prepare the stockholders equity section of Shark School Supply Corporations balance sheet as it would appear immediately after the company issued the common and preferred stock

Notes:

• Common stock, Preferred stock, additional paid‐in‐capital, retained earnings, and treasury stock are all reported on the balance sheet in the stockholders' equity section
• These items are listed and totaled to give total stockholder’s equity in the balance sheet - stockholders equity section.

See sample below: