- Account for the issuance of stock
Shares authorized is the number of shares a corporation is allowed to issue (sell). For a large corporation, this is based on a decision by its Board of Directors, a group elected to represent and serve the interest of the stockholders. Authorization is just permission to sell shares of stock; no action has actually taken place yet. Therefore, there is no journal entry for a stock authorization.
Shares issued is the number of shares a corporation has sold to stockholders for the first time. The number of shares issued cannot exceed the number of shares authorized.
Occasionally, a corporation will buy back its own shares on the open market. We call those retired shares treasury stock. The number of issued shares that are still circulating in the open market are referred to as outstanding.
Look at the most current regulatory reports for The Home Depot, Inc. On page 33 of the 2019 annual report, the company reports the following components of stockholders’ equity:
| in millions, except per share data | February 2, 2020 | February 3, 2019 |
|---|---|---|
| Common stock, par value $0.05; authorized 10,000 shares; issued: 1,786 shares at February 2, 2020 and 1,782 shares at February 3, 2019; Outstanding: 1,077 shares at February 2, 2020 and 1,105 shares at February 3, 2019 | 89 | 89 |
| Paid-in capital | 11,001 | 10,578 |
| Retained earnings | 51,729 | 46,423 |
| Accumulated other comprehensive loss | (739) | (772) |
| Treasury stock, at cost, 709 shares at February 2, 2020 and 677 shares at February 3,2019 | (65,196) | (58,196) |
| Total stockholders’ (deficit) equity | Single line (3,116) |
Single line (1,878) |
| Total liabilities and stockholders’ equity | Single line $ 51,236 Double line |
Single line $ 44,003 Double line |
| Note See accompanying notes to consolidated financial statements | ||
Note this information as of the fiscal year that ended February 2, 2020:
- The par value of the common stock is $0.05 per share.
- The number of shares authorized is listed as 10,000, but all numbers except per-share data are listed in millions, so that is actually 10 billion shares authorized.
- There were 1.786 billion shares issued by the end of the 2019 fiscal year (February 2, 2020).
- The company had 709 million shares of treasury stock at the end of the year (for which they paid $65,196 million dollars, which is an average cost of almost $92 per share).
- If we subtract the number of shares in treasury stock from the number of shares issued (1,786 – 709 = 1,077) we should get the number of shares outstanding, and we do.
The terms above may be better understood with an analogy to a credit card. If you are approved for a credit card, the terms will include a credit limit, such as $5,000, which is the maximum you are allowed to charge on the card. This is similar to “shares authorized,” the maximum number of shares a company is allowed to issue. The credit limit on a card does not mean you have to charge $5,000 on your first purchase but instead that you may continue to charge purchases up until you have reached a $5,000 maximum. The same holds true for shares issued. Smaller numbers of shares may be sold over time up to the maximum of the number of shares authorized.
If you wish to charge more than your credit limit on a credit card, you may contact the company that issued the card and request an increase in your credit limit. They may or may not grant this request. The same is true for a corporation. If it wishes to issue more shares than the number authorized, it may approach the Board of Directors with this request.
From an accounting standpoint, issuing stock is similar to recording any other contribution of capital, except instead of crediting capital contributions, we credit the Common Stock account:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Checking | 150,000.00 | ||
| Oct. 1 | Common Stock | 150,000.00 | ||
| Oct. 1 | To record issuance of 15,000 shares of $10 par stock at $10 per share | |||
If the stock is sold on the open market for an amount greater than the par value, which is most often the case, the entry looks like this:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Checking | 450,000.00 | ||
| Oct. 1 | Common Stock | 150,000.00 | ||
| Oct. 1 | Paid in Capital in Excess of Par – Common Stock | 300,000.00 | ||
| Oct. 1 | To record issuance of 15,000 shares of $10 par stock at $30 per share | |||
The journal entry for issuing preferred stock is very similar to the one for common stock. This time Preferred Stock and Paid-in Capital in Excess of Par – Preferred Stock are credited instead of the accounts for common stock.
Stock may be issued for assets other than cash, such as services rendered, land, equipment, vehicles, accounts receivable, and inventory. This is more common in small corporations than in larger ones. The journal entries are similar to those for issuing stock for cash. In this case, the value of either the stock or the asset must be known. The assumption is that both the asset and the stock have the same value. In other words, if land is known to be worth $450,000 and is transferred to the corporation in exchange for 15,000 shares of common stock, the journal entry would be:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Land | 450,0000 | ||
| Oct. 1 | Common Stock | 150,000.00 | ||
| Oct. 1 | Paid in Capital in Excess of Par – Common Stock | 300,000.00 | ||
| Oct. 1 | To record issuance of 15,000 shares of $10 par stock in exchange for land. | |||
On the other hand, if the fair market value of the land is unknown but the stock is trading for $20 per share, the journal entry would be:
| Date | Description | Post. Ref. | Debit | Credit |
|---|---|---|---|---|
| 20– | ||||
| Oct. 1 | Land | 300,0000 | ||
| Oct. 1 | Common Stock | 150,000.00 | ||
| Oct. 1 | Paid in Capital in Excess of Par – Common Stock | 150,000.00 | ||
| Oct. 1 | To record issuance of 15,000 shares of $10 par stock at $20 per share in exchange for land. | |||