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Issuance of Shares




Issuing shares is essential for corporations to generate capital. This process involves numerous considerations, from obtaining authorization to recording transactions in the accounting system. Below is an in-depth look at each stage of issuing shares, along with examples and adjusted values.

1. Authorization of Capital Stock

Before issuing shares, a corporation must obtain authorization from the state, formalized in its corporate charter. This document specifies:

  • Total Authorized Shares: The maximum number of shares the corporation can issue, which may include both common and preferred shares.
  • Par or Stated Value: Each share might have an assigned par or stated value, often nominal (e.g., $1 or $0.50 per share), to provide a minimum issue price.
  • Memorandum Record: Once authorized, companies record these details in a memorandum entry, documenting the authorized capital for both types of stock.

Example: If a company, Phoenix Corp., is authorized to issue 1,000,000 shares, it records this information in its internal records. No financial impact occurs at this stage, but it ensures compliance with the authorized limit.

2. Issuing Shares for Cash

Corporations may issue stock at par value, at stated value, or as no-par stock. The transaction is recorded to reflect the cash received and the issuance of ownership stakes.

Issuance with Par Value

When stock has a par value, it’s recorded in the Common Stock account at par value, with any additional amount credited to Additional Paid-in Capital.

  • Example: Assume Starworks Inc. issues 600 shares with a par value of $5 at a selling price of $12 each. The journal entry would be:
    • Debit: Cash $7,200 (600 shares x $12)
    • Credit: Common Stock $3,000 (600 shares x $5 par value)
    • Credit: Additional Paid-in Capital $4,200 (excess amount)

Issuance of No-Par Stock

If shares are issued with no par or stated value, the full amount received is credited directly to the Common Stock account.

  • Example: Sparkline Inc. issues 400 no-par shares at $15 each. The entry would be:
    • Debit: Cash $6,000 (400 shares x $15)
    • Credit: Common Stock (no-par) $6,000

This process simplifies accounting, but the corporation must still ensure it doesn’t exceed authorized limits.

3. Costs of Issuing Stock

Issuing stock incurs several costs, including:

  • Legal and Compliance Fees: Costs for legal advice, document preparation, and compliance filings.
  • Underwriting Fees: Fees paid to investment firms for handling the issuance process.
  • Marketing and Printing Expenses: Costs for printing stock certificates and promoting the issuance to potential investors.

These costs are recorded as a reduction in Additional Paid-in Capital, as they relate to financing activities rather than regular business operations.

Example: Alpha Corp. incurs $12,000 in stock issuance costs, which it deducts from Additional Paid-in Capital to reflect the net cash from issuance. This approach keeps financing-related expenses separate from operational costs.

4. Stock Subscriptions

Stock subscriptions allow investors to pay for shares in installments, creating a receivable for the company until full payment is made. Key points include:

  • Subscription Contract: This legally binding contract specifies the number of shares, price per share, and payment schedule. Subscribers agree to the terms and make partial payments over time.
  • Journal Entries for Subscription Payments:
    • Initial Payment: Suppose VisionTech Inc. receives a down payment of $5 per share for 800 shares priced at $15 each. The entry would be:
      • Debit: Cash $4,000 (800 shares x $5 down payment)
      • Debit: Subscriptions Receivable $8,000 (remaining balance)
      • Credit: Common Stock Subscribed $8,000
      • Credit: Additional Paid-in Capital $4,000
    • Final Payment: When the subscriber pays the remaining amount, the company records this payment in Cash and transfers the subscription to Common Stock, fully recognizing the share issuance.

Example: If VisionTech Inc. receives the final $10 per share for all 800 shares, the journal entry would be:

  • Debit: Cash $8,000
  • Credit: Subscriptions Receivable $8,000
  • Debit: Common Stock Subscribed $8,000
  • Credit: Common Stock $8,000

5. Managing Subscription Defaults

When a subscriber defaults on payments, the company can take one of several actions based on contract terms. Options include returning the amount paid, issuing fewer shares based on partial payments, or retaining funds as a penalty.

Example: Suppose a subscriber defaults on 50 shares, paying only $8 per share on a contract priced at $12 per share. The company could:

  • Refund the amount received, minus any fees.
  • Issue 33 shares based on the amount paid.

The specific action depends on the corporation’s policy and the contract terms.

6. Lump-Sum Sales of Stock

Sometimes, corporations issue shares bundled with other securities in a single transaction. In such cases, the corporation must allocate the proceeds among the securities using fair value.

  • Proportional Method: When fair values are available for all securities, the corporation allocates the lump sum based on their proportional values.
  • Incremental Method: If the fair value is known only for some securities, the corporation allocates known values first and assigns the residual amount to the remaining securities.

Example: Brightstone Corp. issues a package of 100 common shares ($10 each) and 50 preferred shares ($25 each) for $2,500 total. Using the proportional method:

  • Allocate $1,000 to common stock and $1,500 to preferred stock based on their fair values.

7. Non-Cash Issuance of Stock

Corporations may issue stock for non-cash considerations, such as patents or services. These transactions require fair value estimates for proper accounting.

  • Example: If Innovations Inc. issues 300 shares of $5 par value stock in exchange for a patent valued at $6,000, the entry would be:
    • Debit: Patent $6,000
    • Credit: Common Stock $1,500 (300 shares x $5 par)
    • Credit: Additional Paid-in Capital $4,500

If the patent’s fair value isn’t known, the corporation can rely on the stock’s market price.

8. Stock Splits

A stock split increases the number of shares and reduces the par value per share, typically to make shares more affordable and increase marketability.

  • Proportionate Split Example: If Galaxy Ltd. has 100,000 shares at $10 par value, a 2-for-1 stock split would double the shares to 200,000 and halve the par value to $5. This split doesn’t affect total equity but makes shares more accessible.

Disproportionate Split Example: Occasionally, companies make uneven adjustments, such as increasing shares without a proportional decrease in par value, to adjust equity structures.

Conclusion

The issuance of shares is a multifaceted process with significant implications for a company’s capital structure. Properly managing authorization, recording issuance transactions, and handling associated costs ensures that companies maintain accurate financial records while effectively raising capital. By adhering to best practices in share issuance, corporations can enhance their financial flexibility and attract a broader investor base.

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