Introduction on Share Issuance
Before we dive into shares accounting problems and answers, let’s go into more details on how shares work. When companies require more funds, they issue new shares to investors. The shares are normally sold in exchange for cash amounts or for other assets such as fixed assets like property, plant and machinery. The shareholder receives a share certificate as evidence of his input towards the capital of the company. The recording of journal entries for the share issuance depends on if the shares were been issued at par value or not. Face value or par value or shares are those which have a face or nominal value attributed to them. These shares can be issued at par value, below par value or above par value.
The journal entry to record par value shares issued at par value results in the cash account is debited and common stock or preferred stock account is credited. The journal entry to record the issuing of shares above par value, results in cash account being debited for the total cash received by the firm, common stock or preferred stock account is credited for the par value multiplied by number shares issued and additional paid-in share capital account is credited for the excess of cash received over the par value multiplied by number of shares issued.
Take a look at basic financial statements sample and feel as a fish in the sea when dealing with financial statements!
On recording the journal entry for par value shares issued below par, leads to the cash account being debited for the actual amount received, common stock or preferred stock account is credited for the total par value and discount on capital account is debited for the surplus of the total par value over the cash received.
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The discount on capital is part of shareholders’ equity and it appears as a deduction from other equity accounts on balance sheet. Entering the journal entry for issued shares having no par value results in the cash account being debited and the common stock or preferred stock account is credited. Sometimes the company’s board of directors can orally assign a value to shares, and this value is known as a stated value and the journal entries will be similar to par value stock.
Issued Shares
Here are a few things you would need to know about issued shares:
- these are authorized shares sold to and owned by shareholders of a company, who are insiders, institutional investors or the general public, as shown in the company’s annual report.
- they are made up of the shares which a firm sells to the public and the shares which given to company insiders as a part of an incentive reward in their compensation package.
- they are issued only once and afterwards the stockholder can sell the shares to another investor.
- the firm has an option to buy back their shares, but the shares remain listed as the organization can resell them at a later date.
- the number of issued shares is recorded on the company’s statement of financial position as capital stock.
- they become important to investors when calculating market capitalization (issued shares times current share price) and earnings per share (EPS), which is issued shares divided by earnings. Investors used these calculations to determine a firm’s value and its performance.
The issue of shares is the process where the company pass new shares to shareholders who may new or existing shareholders. Companies can issue shares to both individuals and corporations. If a company issue shares to the public for the first time, it is known as an initial public offering (IPO). Shares, once issued, will be listed on the stock exchange. The share price on the stock exchange will determine the profit or loss that an investor will incur. Investors who subscribed to the shares of a company are known as equity shareholder. Shareholders have voting rights and are eligible to receive dividends and bonus shares which the company issue, at its discretion, after determining its profits.
Solving Share Issuance Assignment
ASSIGNMENT
SOLUTION
Net income (Net Loss): Delivery Revenue – Total Expenses = $260,000-$283,000=$(23,000). This net income amount is feed into the balance sheet statement and is inserted as a line item in the Shareholders’ Equity Section.
Calculations
Current ratio: Current assets/Current liabilities = 207,000/56,000 = 3.70
This measures the company’s ability to pay off its short-term liabilities with its current assets. a large current ratio of 3.70 means that the company with larger current assets can more easily be able to pay off its current liabilities when they become due without having to sell-off long-term, revenue generating assets.
Debt ratio: Total liabilities/Total assets = 166,000/487,000 = 0.34
This measures a company’s total liabilities as a percentage of its total assets and shows a company’s ability to pay off its liabilities with its assets. A low debt ratio of 0.34 implies a more stable business with a potential of longevity due to its low debt levels.
Equity ratio: Total equity/Total assets = 321,000/487,000 = 0.66measures
This measures a number of assets which are financed by the owners’ investments by comparing the total equity in the company to the total assets. A high equity ratio of 0.66 indicates that the company is worth investing in since so many investors are willing to finance the company.
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