Question

Explain how to account for the issuance of common and preferred stock.

Answer 1

Issuance of Stock

Share can be issued at Par, above Par and Below Par.

When par value shares are issued exactly at par, cash is debited and common stock or preferred stock account is credited.

Journal

Common Stock	Preferred Stock
Cash A/C       DR                           100 To Common Stock                               100	Cash A/C       Dr              100 To Preferred Stock                 100

In case of issuance above par, cash account is debited for the total cash received by the company(105), common stock or preferred stock is credited for the par value multiplied by number shares issued(100) and additional paid-in capital/Share Premium account is credited for the excess of cash received(5) over the par value multiplied by number of shares issued.

Journal

Common Stock	Preferred Stock
Cash A/C DR              105 TO Common Stock                100 To Share Premium                   5	Cash A/C DR             105 To Preferred Stock       100 To Share Premium         5

When par value shares are issued below par, cash is debited for the actual amount received(95), common stock or preferred stock is credited for the total par value(100) and discount on capital is debited for the excess of total par value over cash received(5). The discount on capital is part of shareholders' equity and it appears as a deduction from other equity accounts on balance sheet.

Common Stock	Preferred Stock
Cash A/C                      DR     95 Discount on Capital   DR      5 To Common Stock                           100	Cash A/C                          DR   95 Discount on Capital       DR      5    To Preferred Stock                             100