The total discount on bonds payable at the maturity date as a result of the journal entry for each periodic payment above will be zero. The structure of a journal entry for the cash sale of stock depends upon the existence and size of any par value. Par value is the legal capital per share, and is printed on the face of the stock certificate. Because the cost of treasury stock represents assets that have left the business, this account balance is shown within stockholders’ equity as a negative amount, reflecting a decrease in net assets instead of an increase. Upon reissuance, any amount received in excess of the carrying amount of the treasury shares must be credited to the Capital Stock account.
The additional paid-in capital is a part of total paid up capital that increases the stockholders’ equity. For example, on June 1, 2020, the company ABC paid $60,000 to reacquire 5,000 shared of its common stock back. If the bonds are registered, the corporation does not have to maintain records concerning when each of the particular bonds in the bond issue was purchased or to compute individual partial interest payments. The bonds were issued to yield 12%, which is another way of saying that they were issued at par, and thus the company received the full $100,000. The same as discount bonds, the total interest shall need to divide by the total number of periods until the maturity date of the bonds in order to recognize the interest expense equally for each period. This is called the straight-line method of amortization of bond premium.
In this journal entry, we can debit the additional paid-in capital account only if there is an available balance (the credit side). However, if there is no available balance in the additional paid-in capital account, we will need to debit the retained earnings account instead. For issuing the common stock for the non-cash assets, such as land, building, equipment, etc., the value of the share price on the market is usually used as the cost of the non-cash asset in the exchange. However, if the share price is not available on the market, the cost of the non-cash asset will be used instead.
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Alternatively, the total interest expense to be presented in the income statement is calculated by taking the contracted interest minus the premium on bonds. The stock transactions discussed here all relate to the initial sale or issuance of stock by The J Trio, Inc. Subsequent transactions between stockholders are not accounted for by The J Trio, Inc. and have no effect on the value of stockholders’ equity on the balance sheet. Stockholders’ equity is affected only if the corporation issues additional stock or buys back its own stock. If ten thousand shares of this preferred stock are each issued for $101 in cash ($1,010,000 in total), the company records the following journal entry.
If the company sells the common stock at the price of its par value or stated value, it can make the journal entry by debiting the cash account and crediting the common stock account. There are three main types of stock transactions, which are the sale of stock for cash, stock issued in exchange for non-cash assets or services, and the repurchase of stock. We will address the accounting for each of these stock transactions below. In the balance sheet, treasury stock is reported as a contra account after retained earnings in the stockholders’ equity section.
In this journal entry, the credit of the common stock is the entire proceeds we receive from issuing of the common stock. As the common stock has no par value, regardless of how high the market value is, there won’t be any additional paid-in capital involved here. Assuming that the company XYZ still has a $100,000 outstanding balance of the additional paid-in capital account on the balance sheet before the issuance of these 10,000 shares of common stock. Even though the company is purchasing stock, there is no asset recognized for the purchase. Immediately after the purchase, the equity section of the balance sheet (Figure 14.6) will show the total cost of the treasury shares as a deduction from total stockholders’ equity.
- Thus, ABC Co needs to repay back the principal of the bonds to the bondholders.
- Suppose in the above example the business had issued stock with a par value of 0.50.
- Initially, the company had 10,000 common shares issued and outstanding.
Notice that in all the cases discussed above, both common and preferred stocks have been recorded with par value. The company can make the journal entry for the purchase of treasury stock by debiting the treasury stock account and crediting the cash account. An alternative method of accounting for treasury stock is the constructive retirement method, which is used under the assumption that repurchased stock will not be reissued in the future. Under this approach, you are essentially reversing the amount of the original price at which the stock was sold. The remainder of the purchase price is debited to the retained earnings account. Suppose for example a business issues 1,000 shares of no par common stock at a price of 2.00.
The corporation’s
charter determines the par value printed on the stock certificates
issued. Par value may be any amount—1 cent, 10 cents, 16 cents, $
1, $5, or $100. DeWitt carries the $ 30,000 received over and above the stated value of $200,000 permanently as paid-in capital because it is a part of the capital originally contributed by the stockholders.
No Par Common Stock Journal Entry
A dividend is only legally required if declared by the board of directors. But, if declared, the preferred stock dividend comes before any common stock dividend. However, if there is such discount stock, the accounting treatment would treat such discount as a reduction of par value recorded as a contra account of common stock account. This discount on common stock is not an expense in the income statement; however, as mentioned above, it is treated as a reduction of par value common stock which is presented in the balance sheet. For example, a cash receipt of $8 per share for common stock of $10 par value.
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Even though the difference—the selling price less the cost—looks like a gain, it is treated as additional capital because gains and losses only result from the disposition of economic resources (assets). Assume that on August 1, La Cantina sells another 100 shares of its treasury stock, but this time the selling price is $28 per share. The Cash Account is increased by the selling price, $28 per share times the number of shares resold, 100, for a total debit to Cash of $2,800. The Treasury Stock account decreases by the cost of the 100 shares sold, 100 × $25 per share, for a total credit of $2,500, just as it did in the sale at cost.
The amount shown on the common stock account in this instance would be calculated as follows. Noncumulative preferred stock is preferred stock on which the right to receive a dividend expires whenever the dividend is not declared. When noncumulative preferred stock is outstanding, a dividend omitted or not paid in any one year need not be paid in any future year. Because omitted dividends are lost forever, noncumulative preferred stocks are not attractive to investors and are rarely issued. In this journal entry, both total assets and total equity increase by $100,000 on the balance sheet of the company ABC.
Journal Entries for Interest Expense – Monthly Financial Statements
This is because no other paid-in capital account exists for no-par-value stock. When the shares are reissued, Cash is debited for the proceeds and Treasury Stock is credited for the par value of the shares. Any additional credit is recorded in Capital in Excess of taxable income vs gross income Par, just as if the stock is being issued for the first time. At the time of acquisition, the Treasury Stock account is debited for the par value of the shares, and Capital in Excess of Par is debited for the original amount paid in excess of par at issuance.
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In case of common stock, it just represents a legally binding contract that the stock will not be sold below a certain price, like $0.1 per share or $0.01 per share etc. Moreover, the par value of a common stock often doesn’t have any connection with its dividend rate. Rather, the dividends on common stock are generally announced as certain dollar amount per share, like $5 per share or $10 per share etc. To determine the dividend yield metric, investors can simply divide this per share dividend amount by the per share cost. Par value stock is a type of common or preferred stock having a nominal amount (known as par value) attached to each of its share.
The accounting treatment is the same way as all the types of issuance of common stock as we have covered above. Theoretically, common stock can be issued at par value, no par value, at stated value, or for non-cash assets. DeWitt carries the $ 30,000 received over and
above the stated value of $200,000 permanently as paid-in capital
because it is a part of the capital originally contributed by the
stockholders. Each share of common or preferred capital
stock either has a par value or lacks one.
As you can see from the journal entry above, the total common stock equal to the cash received from investor. On October 1, 2020, the company ABC sell the 5,000 shares of treasury stock above at the price of $15 per share. In accounting, the company needs to account for the treasury stock under the cost method. In other words, the company needs to record the treasury stock at the amount it paid to acquire it back.
