Accounting for Common Share Issues
¾ The primary objectives in accounting for the issue of common shares are to identify
the specific sources of contributed capital and maintain the distinction between
contributed capital and retained earnings. The issue of common shares affects only
contributed capital accounts.
Issuing No Par Value Shares for Cash: shares are most commonly issued in exchange for
cash. When no par value common shares are issued, the entire proceeds from the issue
become legal capital.
Issuing Stated Value Shares for Cash: stated value does not indLFDWHDVKDUH¶VPDUNHWYDOXH
The cash proceeds from issuing stated value shares may be equal to or greater than stated
value. The proceeds cannot be less than stated value, since it is prohibited to issue shares at
less than stated value. When the issue of common shares for cash is recorded, the stated value
of the shares is credited to the Common Shares account. The portion that is above stated value
is recorded in a separate contributed capital account.
Issuing Par Value Shares for Cash: The entries for par value shares are similar to those for
stated value shares. The par value represents legal capital, and the number of shares issued
multiplied by the par value is credited to the Common Shares account; excess is credited to
the Contributed Capital in Excess of Par Value account.
Issuing Shares for Services or Noncash Assets: shares may also be issued for services or for
noncash assets. To comply with the cost principle in a noncash transaction, cost is the cash
equivalent price. The cash equivalent price is the fair market value of the consideration given
up. If this amount cannot be determined, we look to the fair market value of the consideration
received to determine the cash equivalent price, and thus the cost. The stated value of the
shares is never a factor in determining the cost of the assets received, because it does not
represent economic value.
Reacquisition of SharesWRLQFUHDVHWUDGLQJRIWKHFRPSDQ\¶VVKDUHVLQWKHVHFXULWLHVPDUNHW
in hopes of enhancing market value, reduce number of shares issued and thereby increase
EPS, have additional shares available to reissue, additional shares for acquisition of other
companies, to comply with percentage share ownership requirements, and eliminate hostile
shareholders by buying them out. When a federally incorporated company reacquires its own
shares, the shares must be retired. Some provincially incorporated companies are also allowed
to hold reacquired shares for future uses. Shares for this purpose are called treasury shares.
Treasury shares will result in a difference between issued shares and outstanding shares.
Issued shares are those that have been sold. Outstanding shares are those that have been sold
and are held outside of the company.