Corporations can issue stock directly to investors
or indirectly through an investment bank.
Investment banks consider several factors when trying to set the initial stock price,
including future earnings, market conditions, and anticipated dividend rates
If you have ever heard the term “IPO” it means Initial Public Offering,
and it’s what we are talking about here.
After the initial offering the market price of the stock is determined by supply and demand.
Since supply is fixed-until there's a new offering-
movement and demand causes the market price to go up or down.
when more people want to buy the stock than want to sell the stock, the price goes up.
Historically stock was issued with a legal value known as "par value."
Par value was just an arbitrary value assigned to a share of stock
as required by a state.
Usually par value was set low to avoid legal issues.
In fact, most states do not allow companies to issue stock below par value,
so often par value is $.01 to $1.00.
Nowadays, most states no longer required par value,
so no-par value stock is becoming more popular.
Sometimes corporations assigned a stated-value to a no-par stock.
So let's look at some examples of issuing different types of common stock.
Here we have a simple example of par-value stock being issued at par-value.
You’ll never see this type of transaction in real life but it’s a good place to start here.
In this example, the Wombats Corporation issues 15,000 shares
of $1 par-value stock for $15,000.
So Cash is debited for $15,000 and Common Stock is always credited for its par-value,
which in this case is also $15,000.
In this next example, the Wombats Corporation issues 15,000 shares of $1 par-value stock
for $50,000.
This is a much more common occurrence.
Cash is debited for $50,000,
and common stock is always credited for its par value, which in this case is $15,000.
Finally, the difference is credited to an account called Paid-In Capital in Excess of Par
for the amount of $35,000.
In this next example, the Wombat Corporation issues 15,000 shares of no-par value stock
for $40,000.
Cash is debited for $40,000 and Common Stock is credited for $40,000.
There is no other account used when stock is no-par value.
In this example, the Wombat Corporation issues 15,000 shares
of no-par, $2 stated value stock for $60,000.
The accounting for stated value stock and par value stock are very similar.
So Cash is debited for $60,000,
and Common Stock is credited for its stated value, which in this case is $30,000.
Finally, the difference is credited to an account called
Paid-In Capital in Excess of Stated Value for $30,000.
Finally stock can be issued for assets other than cash.
In this example, the Wombats Corporation issued 15,000 shares of $1 par-value stock
for Equipment with the fair market value of $60,000.
Equipment is debited for $60,000,
and Common Stock is always credited for its par-value, which, in this case, is $15,000.
Finally the difference is credited to Paid-in Capital in Excess of Par
for $45,000.
From this last transaction, the Stockholders’ Equity Section would look like this.
The Paid-In Capital section shows Common Stock at its par-value
and Paid-In Capital in Excess of Par.
These two accounts together would equal the Total Paid-in Capital balance.
I just made up the Retained Earnings to show how that would look
to complete out the section.