Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 11 Stockholders’ Equity: Capital Stock and Dividends 499

ISSUING STOCK

A separate account is used for recording the amount of each class of stock issued to

investors in a corporation. For example, assume that a corporation is authorized to is-

sue 10,000 shares of preferred stock, $100 par, and 100,000 shares of common stock, $20

par. One-half of each class of authorized shares is issued at par for cash. The corpora-

tion’s stock issue is recorded as follows:^4

Stock is often issued by a corporation at a price other than its par. This is because

the par value of a stock is simply its legal capital. The price at which stock can be sold

by a corporation depends on a variety of factors, such as the following:

1. The financial condition, earnings record, and dividend record of the corporation.


2. Investor expectations of the corporation’s potential earning power.


3. General business and economic conditions and prospects.

Premium on Stock

When stock is issued for a price that is more than its par, the stock has sold at a

premium. Thus, if stock with a par of $1 is issued for a price of $55, the stock has sold

at a premium of $54.

When stock is issued at a premium, Cash or other asset accounts are debited for

the amount received. Common Stock or Preferred Stock is then credited for the par

amount. The excess of the amount paid over par is a part of the total investment of the

stockholders in the corporation. Therefore, such an amount in excess of par should be

classified as a part of the paid-in capital. An account entitled Paid-In Capital in Excess

of Paris usually credited for this amount.

To illustrate, assume that Caldwell Company issues 2,000 shares of $1 par com-

mon stock for cash at $55. This transaction is recorded as follows:

Amount distributed $22,000

Preferred dividend (1,000 shares):

2006 dividend in arrears $4,000

2007 dividend in arrears 4,000

2008 dividend 4,000 12,000

Common dividend (4,000 shares) $10,000

Dividends per share:

Preferred $ 12.00

Common 2.50

Describe the financial
statement effects of issuing
stock.

3

4 The accounting for investments in stocks from the point of view of the investor is discussed in the next

Chapter

Cash 1,500,000

Preferred Stock 500,000

Common Stock 1,000,000

Exhibit 3

Concluded

SCF BS IS

Fc Ac SEc —