84 Analyze and Record Transactions for the Issuance and Repurchase of Stock

Chad and Rick have successfully incorporated La Cantina and are ready to issue common stock to themselves and the newly recruited investors. The proceeds will be used to open new locations. The corporate charter of the corporation indicates that the par value of its common stock is ?1.50 per share. When stock is sold to investors, it is very rarely sold at par value. Most often, shares are issued at a value in excess of par. This is referred to as issuing stock at a premium. Stock with no par value that has been assigned a stated value is treated very similarly to stock with a par value.

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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. Another investor could provide legal fees in exchange for stock. The general rule is to recognize the assets received in exchange for stock at the asset’s fair market value.

Typical Common Stock Transactions

The company plans to issue most of the shares in exchange for cash, and other shares in exchange for kitchen equipment provided to the corporation by one of the new investors. Two common accounts in the equity section of the balance sheet are used when issuing stock—Common Stock and Additional Paid-in Capital from Common Stock. Common Stock consists of the par value of all shares of common stock issued. Additional paid-in capital from common stock consists of the excess of the proceeds received from the issuance of the stock over the stock’s par value. When a company has more than one class of stock, it usually keeps a separate additional paid-in capital account for each class.

Issuing Common Stock with a Par Value in Exchange for Cash

When a company issues new stock for cash, assets increase with a debit, and equity accounts increase with a credit. To illustrate, assume that La Cantina issues 8,000 shares of common stock to investors on January 1 for cash, with the investors paying cash of ?21.50 per share. The total cash to be received is ?172,000.


The transaction causes Cash to increase (debit) for the total cash received. The Common Stock account increases (credit) with a credit for the par value of the 8,000 shares issued: 8,000 × ?1.50, or ?12,000. The excess received over the par value is reported in the Additional Paid-in Capital from Common Stock account. Since the shares were issued for ?21.50 per share, the excess over par value per share of ?20 (?21.50 − ?1.50) is multiplied by the number of shares issued to arrive at the Additional Paid-in Capital from Common Stock credit.


Just after the issuance of both investments, the stockholders’ equity account, Common Stock, reflects the total par value of the issued stock; in this case, ?3,000 + ?12,000, or a total of ?15,000. The amounts received in excess of the par value are accumulated in the Additional Paid-in Capital from Common Stock account in the amount of ?5,000 + ?160,000, or ?165,000. 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).


If the 8,000 shares of La Cantina’s common stock had been no-par, and no stated value had been assigned, the ?172,000 would be debited to Cash, with a corresponding increase in the Common Stock account as a credit of ?172,000. No entry would be made to Additional Paid-in Capital account as it is reserved for stock issue amounts above par or stated value. The entry would appear as:


(Figure) shows what the equity section of the balance sheet will reflect after the preferred stock is issued.


Even though the company is purchasing stock, there is no asset recognized for the purchase. An entity cannot own part of itself, so no asset is acquired. Immediately after the purchase, the equity section of the balance sheet ((Figure)) will show the total cost of the treasury shares as a deduction from total stockholders’ equity.


Reissuing Treasury Stock above CostManagement typically does not hold treasury stock forever. The company can resell the treasury stock at cost, above cost, below cost, or retire it. If La Cantina reissues 100 of its treasury shares at cost (?25 per share) on July 3, a reversal of the original purchase for the 100 shares is recorded. This has the effect of increasing an asset, Cash, with a debit, and decreasing the Treasury Stock account with a credit. The original cost paid for each treasury share, ?25, is multiplied by the 100 shares to be resold, or ?2,500. The journal entry to record this sale of the treasury shares at cost is:


Reissuing Treasury Stock Below CostIf the treasury stock is reissued at a price below cost, the account used for the difference between the cash received from the resale and the original cost of the treasury stock depends on the balance in the Paid-in Capital from Treasury Stock account. Any balance that exists in this account will be a credit. The transaction will require a debit to the Paid-in Capital from Treasury Stock account to the extent of the balance. If the transaction requires a debit greater than the balance in the Paid-in Capital account, any additional difference between the cost of the treasury stock and its selling price is recorded as a reduction of the Retained Earnings account as a debit. If there is no balance in the Additional Paid-in Capital from Treasury Stock account, the entire debit will reduce retained earnings.

Assume that on October 9, La Cantina sells another 100 shares of its treasury stock, but this time at ?23 per share. Cash is increased for the selling price, ?23 per share times the number of shares resold, 100, for a total debit to Cash of ?2,300. The Treasury Stock account decreases by the cost of the 100 shares sold, 100 × ?25 per share, for a total credit of ?2,500. The difference is recorded as a debit of ?200 to the Additional Paid-in Capital from Treasury Stock account. Notice that the balance in this account from the August 1 transaction was ?300, which was sufficient to offset the ?200 debit. The transaction is recorded as:


Based on the partial balance sheet presented, answer the following questions:

At what price was each share of treasury stock purchased?What is reflected in the additional paid-in capital account?Why is there a difference between the common stock shares issued and the shares outstanding?


A. ?240,000 ÷ 20,000 = ?12 per share. B. The difference between the market price and the par value when the stock was issued. C. Treasury stock.

Key Concepts and Summary

The initial issuance of common stock reflects the sale of the first stock by a corporation.Common stock issued at par value for cash creates an additional paid-in capital account for the excess of the issue price over the par value.Stock issued in exchange for property or services is recorded at the fair market value of the stock or the asset or services received, whichever is more clearly determinable.Stock with a stated value is treated as if the stated value is a par value. The entire issue price of no-par stock with no stated value is credited to the capital stock account.Preferred stock issued at par or stated value creates an additional paid-in capital account for the excess of the issue price over the par value.A corporation reports a stock’s par or stated value, the number of shares authorized, issued, and outstanding, and if preferred, the dividend rate on the face of the balance sheet.Treasury stock is a corporation’s stock that the corporation purchased back. A company may buy back its stock for strategic purposes against competitors, to create demand, or to use for employee stock option plans.The acquisition of treasury stock creates a contra equity account, Treasury Stock, reported in the stockholders’ equity section of the balance sheet.When a corporation reissues its treasury stock at an amount above the cost, it generates a credit to the Additional Paid-in Capital from Treasury stock account.When a corporation reissues its treasury stock at an amount below cost, the Additional Paid-in Capital from Treasury stock account is reduced first, then any excess is debited to Retained Earnings.

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(Figure)The total amount of cash and other assets received by a corporation from the stockholders in exchange for the shares is ________.

always equal to par valuereferred to as retained earningsalways below its stated valuereferred to as paid-in capital

(Figure)Stock can be issued for all except which of the following?

accounts payablestate income tax paymentsproperty such as a delivery truckservices provided to the corporation such as legal fees