Issuance of Stock Intermediate Accounting CPA Exam FAR Chp 15 p 3

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“And welcome to the session in which we would look at accounting procedures for issuing issuing stock. So we re going to look at how to issue stocks and the procedures that involve issuing stocks. So when the company issue stocks they re gonna have shares authorized shares sold and shares issued on the balance sheet. The company will have to show how many shares are.

Authorized let s assume they have authorized to. Sell 100000 shares of. Those authorized they have sold. 60000 and the 60000.

Our issue. That means they are sold and issued and outstanding with the outsiders would be someone outside. The. Company okay so they are authorized to.

Issue. 100000. Sold 60000. And those sold are issued and outstanding.

It means they are sold and the company holds none of them. Okay so if you re wondering what s happening to the 40000. Shares. Because if we are authorized.

100. Sold. 60. Well they don t.

Exist. Yet the 40000. Shares. Don t exist and who gives us the authorization as we said in the previous session.

It s the state in which we operate they tell us how many shares we can author on how many shares are authorized to issues when we deal with a show in stocks we have basically five issues to deal with we re gonna have stocks with a par value stocks with no part value we re gonna issue stocks in combination with other securities. We re gonna issue stocks for non cash. Transaction and we re gonna deal with the cost of issuing stocks so those are the five issues that we need to deal with in this session starting with talking about the par value the par value is it s a number assigned to the stock. So basically the part value could be a dollar could be a penny could be ten pennies could be point zero zero.

One which is less than a penny 100. 100 of a penny or one thousandth of a penny so the part the part value helps company avoid contingent liabilities and you re gonna see the part value it s gonna be used to credit common stock. When what happened is this the par value is the amount that the company set up theoretically to protect to protect the creditors. So this is the amount that should be invested by the shareholders.

So that s why companies assign a low part value so so they don t have they don t have to guarantee anything to the creditors because that s the amount to protect the creditors. Theoretically. So if they have signed a low part value there s a small amount. But you have to have the part value if it exists in theory.

But some companies don t even have par value so just know that it s a number assigned to the stock by the company and that s all what you need to know. Corporation. Maintains account for the preferred stock. Common stock and paid a nap paid in capital in excess of preferred and an access of common so here s what s gonna happen we re gonna have common stock and this number is gonna equal number of shares and this is important times.

The part value then we re gonna have a pick additional paid in capital common stock. And that s gonna be the extra money the excess money above the par value so let me show you a quick example. Let s assume. We issued one stock for ten dollars.

So you should one stock for 10. So the company sold the stock received a 1 let s assume the par value for this stock equal to 2. So what s gonna happen it should one stock times two so the common stock is 2 and since we received 8. The apec common stock is 8.

The same concept is for the preferred stock. The preferred stock is the number of shares times. The par value and we re going to have additional paid in capital p. S.

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Preferred stock. Which is the access or the extra above the par value. But all these accounts. What do they have they have the amount invested by the owner so preferred stock common stock.

Additional paid in capital. This is the amount invested by the amount represent the amount invested by the stockholder. The amount invested by the stockholder. Now let s take a look at the first example.

Blue diamond corporation. Issue. 300. Shares part value stock.

300 years of ten. Dollars so the par value is ten dollar stock for 4500. So what did they receive they received cash for 4500 that s the cash how much do we credit. Common stock.

It s the number of shares times. The par value number of shares times. The par value that s the common stock and whatever s left whatever is left this is the access. This is the amount above the pot.

Which is which is 1500. This is paid in capital and access of four in excess of four. So basically we sold each share. So if we take four thousand five hundred divided by 300 shares just to find out how much we sold each share so i could break it down for you in terms of dollar dollar per share.

So we sold each year for 15 10 is the power and this is the amount here and 5 sd is the amount and axis of power. What happen if we have a no part of stock. No part stock like apple apple has a no par stock apple computers has a no part stock reasons for issuance part stock yet avoid contingent liability. So in theory.

We don t have to we don t have a specific amount set up for the creditors. But usually the company will set up an amount to protect the creditors. But don t worry about this just know companies can issue stocks with no part of al you avoid confusion over recording part value versus fair value so to avoid this confusion. What is a major disadvantage of no par value.

It s in some states. They alivia high taxes on these issues so in some states. If you issue those stocks the state makes you pay heavy tax and this is not good for business. Because you have to paid you have to pay the taxes in addition in some state.

The total issue price for no par start may be considered legal capital which could reduce the flexibility of paying dividend and that s the other thing you cannot pay dividend. You cannot. This is why it protect the two you protect the creditors. You cannot pay dividend from common stock socom you cannot pay dividend from common stock.

So that s gonna give you less flexibility in paying dividend and why is that once again. The reason is a common stock. If you don t pay dividend that means you are protecting the the the you are preserving your cash and by preserving your cash you are protecting who you are protecting the creditors. This is the idea of come the idea behind the par value the par value is you cannot pay those in stocks you cannot pay those in dividend.

Therefore. If you cannot pay them in dividend. The money stays with the company and as the money stays with the company. The the creditors are protected in a sense.

But again just this is everything i said about protection for creditors just take it with a grain of salt. What matters is make sure you know what a part value how it s used in a journal entry and how it s presented on the balance sheet. Now. Let s take a look at another example.

We have this company. This electronics corporation is organized with authorized common stock of ten thousand shares without a part of value. So. This is like apple computers.

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No part value if this company issue 500. Shares at 10 wealthy they sold 500 shares and they sold them at 10 let s start with cash 500. Times 10 is 5000. Cash.

And do we have any power. No power. Therefore the credit is to common stock that s it we are done so when there is no power. When there is no part value no apec no additional paid in capital because additional paid in capital is the access over the par.

If there is no access notice no apec so everything goes to the common stock. Some state requires that the no part value has a stated value when we say the stated value. It s the same as the par value and especially from an accounting perspective is the same as the par value if a company issued 1000. Shares with a 5 stated value translation par value at 15 for cash it makes the following journal entry first start with cash 1500 shares.

Times. 15 that s the cash. Credit common stock number of shares 1000. Times.

The stated value which is 5 again we use the stated value the same thing as part and the remainder is paid in capital and access of not part and access of stated as you see it s the same exact concept the same exact concept same exact concept stock issued with other securities. This is a lump sum purchase. This is a lump sum purchase how do we deal with the lump sum purchase it means. We re gonna be buying more than.

We re gonna be selling not buying more than one securities in one shot. So and one shot will will sell more than one securities. And what do we sell we sell common stock and preferred stock and how do we deal with those well we have we have two methods. The proportional method and the incremental method and let s take a look at two methods are very they are very logical from a mathematical perspective.

So let s take a look at them okay. So we have this company. Issued. 300.

Shares of 10 par value common stock. And 100. Shares a 50 par value preferred stock for a lump sum of. 13500 so we sold we sold both preferred and common and we received 13500 in total.

But we were not told how much goes to the common how much goes to the preferred okay common stock. So we know the common stock fear of market value is 20 dollars per share. And the preferred has a market value of 90. So we know the preferred market and the common market fair fair value okay so let s find the fair about fair value and use the proportional method.

Let s take a look at it. So let s take a look at this 300 shares times 20 will give us 6000. 100. Years of the preferred stock times 90 gives us a value of.

9000 so together the fair market value of both is. 15000 but we only received 13500. Now we need to find what s the fair market value for each end relationship to the total so if we. Take 6000 divided.

By 15000 gives. Us 40 a full take. 9000 divided by 15000. It gives us 60.

So of this deal of the thirteen thousand four hundred forty percent goes to the common right here and of the thirteen thousand five hundred sixty percent goes to the goes to the preferred. So this is the amount that s gonna be credited to the comment. This is the amount that s going to be credited to the preferred and the total. Cash we re going to be receiving is 13500.

The this is let s prepare the journal entry for the issuance of stock obviously we ll start with cash. Thirteen thousand five hundred we credit comments. Let s see if starting with preferred stock number of shares times. The par value how did we come up with this fifty dollars.

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It is right here the par value is 50 dollars fifty dollars then paid in capital in excess of par values 31. Hundred now we issue the common stock number of shares times the par value number of shares times. The par value and anything left is gonna be paid in capital. So notice.

This is the preferred total of fifty four hundred this is the i m sorry this is wrong this is the preferred total of. 8000. 100 and this is the common total of 5400. This is how we do the journal entry now for if we use the increment.

Pull method. Okay. Let s assume issued 300. Shares.

At 10 par. Value common stock in 100. Years a 50. Value preferred stock for a lump sum of 13500.

Now. Here s what happened here when we use the incremental method. This is one we only know one fair value so we know the fair value of the common stock. We know that the common stock is worth 20 per share.

But we don t know what the preferred stock is guess. What we re gonna say well this is what goes for the common and everything else is for the preferred. So here s what we do we ll take 300 shares times 20. So we know this for sure we are told that the fair value of the common is.

20 so we know this for sure we know of. The 13500 we know up to 13500 of the. 13500 6000 is common well of 6000. Has come in what s left what s left is 7500 this amount goes to the preferred.

Stockholders so the preferred amount is 7500. So. When is this method used this method used when we know only one a market value for one of the stocks not for both so. This is the incremental method.

So the additional amount that s left goes to the other security security so prepare the journal entry this should be straightforward debit cash credit preferred stock number of shares times the par value and the prefer supposed to be 7500. So we still have 2500 for apec. Common stock number of shares times the par value what s left is additional paid in capital of 3000. And this is the journal entry for the incremental method pretty straightforward now we could also issue stocks for non cash transaction.

So we can issue stocks and do what receive something other than cash other than cash means. What stocks i m sorry asset of any kind or pay an expense for pay in expense by issuing stocks. So the company should record stock issued for services on property other than cash at how do we determine the fair value well. If we know the fair value of the stock issued that s the first thing then problem solve if we don t know the fair value of the stock let s assume.

The stock is not publicly traded. We look at the fair value we look at the fair value of the of the non cash consideration received. We look at the fair value of the non cash consideration. Received and and we would we would look at that okay.

So let s look at an example. So whichever is clearly more determinable is this if the stock is publicly traded we use the first one if the stock is not publicly traded. We look at the non cash consideration. Received let s take a look at an example the following series of.

Transaction illustrate procedures for recording issuance of 10000. Shares of tenta of 10 par value of 10 par value stock for a patent for our ganda company in various circumstances. Let s let s start with this the first situation organda cannot really determine the fair value of the. Patent but it knows that the fair value of the stock is 140000.

Well think about it it has to be in equal. Exchange if ever. Dif if the fair value is 140000. If the fair value is.

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103 if the fair value of the stock is 140000. And we don t know the value of the. Patent the pendant must be worth 140000. But since we know for sure the.

Fiat the fair value of the stock then the patent is worth. 140000 so we bought an asset for 140000. Credit. Common stock for the number of shares times.

The par value and whatever s left is additional paid in capital. Okay. So why did we go with our fair value. Because our fair value is known and first thing we go with that scenario.

2. We don t know the fair value of the stock so our stock fair value is not known. But we determine the fair value of the patent is 150 so the fair value of the patent is. 150 and they accept the 10000.

Shares from us. It means our shares are worth 150 thousand. If i gave you something and you gave me something that s worth 150 thousand. If we are both reasonable people.

The exchange for me is 150 and the exchange for you as 150 so if you think it s worth 150. And you accept that stocks from me this implies that you think my stocks are worth 150. So i don t know what s the vampyre value of my stock. But since the patent is known then the fair value of my stocks is 150 so i debit patent 150 credit common stock number of shares times the par value which is 10000.

Shares times. 100 or sorry. 10. 10.

And whatever s left is paid in capital in excess of common stock. Now our ganda cannot rarely determine the fair value of the stock. Nor. The fair value of the patent.

An independent consultant value the patent at one hundred and twenty five thousand dollar based on the discounted expected cash flow well well. If that s all what we have that s all what we have that s all what we re gonna go with so this if that s all what we have that s all we have so the patent is worth one hundred and twenty five thousand we credit common stock number of shares times. The par value and we credit a pig for the remainder. Okay now is it possible we don t know both it is possible.

But it doesn t usually happen so at least. We can find the value of something either our stock or the asset that we are that we are buying now this one let you know that you could also pay expenses using stocks let s assume you paid your employees for so you owe your employee is five five thousand dollars. And you don t have you know you don t have cash right now. So you told them i ll give you ten stocks well if you gave them ten stocks then you debit salaries expense they owe you 5000 salaries expense five thousand and you gave them common stock so you should common stock.

And let s assume you said. You said you gave them five stocks so 5 stocks times and a part value is 10. That s 50 common stock and a pic common stock is 4500. So this is the entry.

So you could also issue stocks for for for expenses for expenses. So. This is an expense here. It s an asset and this asset could be a land could be a building also you could issue stocks to pay off your debt.

So. If you have that that s another way you can issue stocks so if you owe someone 125000 and if they accept stocks so you debit notes payable she did also issue stocks for liabilities to remove your to remove your to remove your debt one more thing you want to deal with is that we need to deal with is cost of issuing stocks so we re gonna incur constituition stocks underwriting cost maybe we need a broker maybe you need an investment banker to sell our stocks we re gonna include accounting fees to prepare all the prospectus filed with the sec. If we re filing with the sec legal fees printing cost and taxes any cost that s associated with selling the stock those are costs associated with selling the stock ok directly selling the stocks those are not an expense. Not an expense.

So how do we account for them we reduce paid in capital so when we issue the stock we debit cash and we reduce the cash and we debit we ran and we debit additional paid in capital so we reduce apec so they re not an expense it s a reduction and the amount and the paid in capital amount and the apec account okay and that s the whole thing i m gonna go with it right now the next topic we re gonna cover is treasury stock if you have any questions by all means email me ” ..

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