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Stockholders' Equity - Accounting Examples
Stockholders' Equity - Accounting Examples
Let's assume that a company wants to raise $10,000 through the issuance of
common stock. At the time the stock is sold the market price is $50 per share.
the company will, therefore, have to issue 200 shares. Let us also assume that
the par value of the stock is $10. Here is the journal entry that the company will
make following the sale of the shares:
Cash (200 shares x $50) 10,000
Common Stock (200 shares x $10)) 2,000
Add’l Paid in Capital (10,000 - 2,000) 8,000
Common stock can also be authorized as no par. In this case, no par value is
assigned to the shares. From an accounting standpoint, the only effect of this
designation is that the common stock account is credited for the full amount of
the proceeds and no additional paid-in-capital account exists as follows:
Cash (200 shares x $50) 10,000
Common Stock (200 shares x $50)) 10,000
A third form for the stock is no par with a stated value. From an accounting
standpoint, stated value is treated the same way as par value. For example,
assume that the common stock in this example is no par stock with a stated
value of $5. The journal entry for the stock issuance would be as follows:
Cash (200 shares x $50) 10,000
Common Stock (200 shares x $5)) 1,000
Add’l Paid in Capital (10,000 - 1,000) 9,000
The following example illustrates the accounting for stock repurchases (treasury
stock) utilizing the cost method. This is the most common approach. Under this
method, an account called treasury stock is debited for the cost of the shares
repurchased. This treasury stock account is a contra-equity account. That
means, it is included in stockholder's equity, but is reflected as a negative amount
(hence the use of the word "contra"). When the shares are subsequently re-
issued, treasury stock is credited for the cost of the shares and any difference
between the re-issue price and this cost is reflected as an adjustment to
additional paid-in-capital form treasury stock.
If 500 shares are subsequently sold at a market price of $30, the journal entry to
reflect this sale is as follows:
Cash (500 x 30) 15,000
Treasury stock (500 x 25) 12,500
Additional paid-in-capital 2,500
If the resale price is less than the original purchase price, additional paid-in-
capital is debited and if there is not a sufficient balance in the additional paid-in-
capital account to absorb the debit, retained earnings is debited for the excess.
The accounting for stock dividends is divided into two categories: small stock
dividends (generally less than 20-25% of the outstanding shares) and large stock
dividends (greater than 25% of the outstanding shares). Furthermore, two dates
are important: the declaration date (when the dividend is declared to be paid by
the board of directors) and the date of distribution (then the chares are actually
sent to the shareholders).
Declaration date
Distribution date
Declaration date
Distribution date