12. Stockholders' Equity
Issuing Par Value Stock
Issuing Par Value Stock Definitions
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Alright. So let's discuss the issuance of par value stock. We're gonna talk about some of the key numbers that we use and the journal entries that we make. So when we talk about issuing common stock, that just means selling common stock to the public. And remember when we sell common stock, this isn't like making revenue, this is selling equity in the company. Right? So let's talk about some of the key terms. We're gonna see first, we're gonna see a selling price, right? What do we sell the stock for to the public? Well This can be told to you as a total amount. Maybe you sold 50,000 shares for $1 million, right? Or it can be told to you on a per share amount, you sold 50,000 shares for $20 each or whatever it comes out to be cool. So uh there's the selling price. Then we're going to talk about this notion of the par value. So the par value is this idea of what it can be redeemed for. You don't have to get into too much. Uh thought about what the par value, what it means and everything. Uh The key thing you want to think about without getting into the details is really that the par value is what's gonna go into the common stock account. So part value. This goes into the common stock account and then everything else goes into this other account called additional paid in capital. Alright. Let's talk a little little quickly about par value. When we talked about bonds, right, bonds payable. The bonds had a par value, usually $1000. Well that was the the amount that the bond was redeemed for. Right? We're gonna see the same thing with common stock that there's gonna be some par value, but generally the par value is very low. Okay, so the par value of a common stock is usually very low and generally we're going to see it as less than $1. Okay, It's usually less than $1. Um Because they don't want to have a liability for this par value if the if the stock isn't doing too well, but regardless remember the par value, that's what goes into the common stock account and the rest of the money goes into this additional paid in capital. So this is the amount above par value that investors paid for the stock. Now, if you guys are like, I don't get this par value thing. Look don't spend too much time on it. It's not a big deal in this course. Uh Just know that you're gonna be splitting up the money that you bring in by selling the stock into two accounts. The common stock for the par value and then additional paid in capital. This A. P. I. C. We're gonna use a pick is usually how you call it. Just a pick, additional paid in capital is going to be where you put all that excess value. Sometimes you'll see additional paid in capital called uh excess of par, something like that paid in paid in capital, sorry, paid in capital in excess of par. It depends on your textbook, but look how many words that is, it's so much easier to just use a pick and that's usually what you're gonna see throughout your courses. So a pic is just the best way to think about it. And we've got that nice little acronym. Okay, so why don't we pause here and then we're gonna go through two examples of selling stock with a par value. Alright, let's check it out.
Issuing Par Value Stock at Par Value
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Alright. So first let's talk about when the selling price is equal to the par value. Okay so when we sell the stock equal to the par value. Well in that case there's not gonna be any apec there's no additional paid in capital. Right? Because remember the par value goes to the common stock account and any extra money we bring in goes to additional paid in capital. Well if the selling Price is the par value then there's no additional right? We're only gonna have the par value. So let's look at this example the apartment depot issued 500,000 shares of 50 cent par value common stock for $250,000. Now this is a very common way that they're going to say this to you notice. They're gonna say 50 cent par value. Common stock so that just tells you that they're selling common stock has a 50 cent par value. Right so how many shares did they sell? 500,000 shares for $250,000. Notice in this case they told you the total selling price of All the shares, they can easily just tell you a per a per share amount instead of the total price. And you should be able to convert between the two by dividing by the number of shares sold. Okay so let's see how much each share was sold for by dividing our total selling price of 250,000 Divided by 500,000 shares. Soul equals 50 cent selling price per share. Right? They sold each share for 50 cents and that was because we took that total $250,000 divided by the 500,000 shares gives us a 50 cent per share selling price. Right? And notice our par value is 50 cents. Our per share selling price was 50 cents. So there was no additional paid in capital. Right? So let's go ahead and do our journal entry when there's no additional paid in capital. It's pretty easy. What what would be our debit? We sold it for $250,000. So we received cash of $250,000. So our debit is gonna be cash for 250,000. And what about our credit? Remember the par value of the stock is going to go to the common stock account and anything extra goes to additional paid in capital. So remember common stock is an equity account and equity accounts have credit balances, right? So we're gonna have common stock as our credit here and we're gonna put the par value into this account. So the way we would always do it regardless of whether they sell it at par value or at some amount more. We would take the number of shares sold 500,000 Times The par value of 50 cents. And it would give us 250,000. So that is the amount that needs to go to the common stock account? Obviously in this case they got sold at par value. So there's nothing extra. But we're always gonna want to do this this uh calculation right here to find what goes into the common stock account, right? And then the A pick, whatever's extra is gonna be the selling price. So the total total selling price - What went into common stock, right? Everything extra would be a pick, which in this case is zero, right? In this case it's zero because we we sold it at par value. So the credit here to common stock is the 250,000 received. Okay, now we're gonna see also an example with a pick down below, but let's go ahead and finish this one up. So what did we have? We had assets, we received cash of 250,000. So that increased our assets by 250,000 and that came from equity. Right? We we issued equity and that came in the common stock account That went up by 250,000. So our equation stays balanced here, assets, equal liabilities plus equity. Right, cool. All right. Now, let's see an example with additional paid in capital. A pick. Alright, let's do that in the next
Issuing Par Value Stock above Par Value
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Alright now let's see an example where the selling price is greater than the par value. Now you're not really going to see an example where the selling price is less than par value. I don't think I've ever seen that before. So we're gonna focus here on this is the most common case where we're gonna have a selling price greater than the par value. Well this journal entry is going to include a pick right? Because the par value is gonna go to the The common stock account and everything extra goes into this additional paid in capital account. Okay? So let's check it out. The apartment depot issued 50 excuse me, 500,000 shares of 50 cent par value. Common stock for $2 per share. So notice this time they gave you a per share selling price and they can do it either way they can give you the total amount that you received or they can give you a per share selling price. Okay. And you should be comfortable uh converting between the total amount receive and the per share selling per share amount. Okay And that's really simple. You just have to divide by the number of shares, right, divide by the number of shares or multiply by the number of shares to get to the total cash received. Okay. So remember in this journal entry what we're always going to see in these journal entries we're gonna receive some amount of cash, right? That's gonna be a debit in our journal entry and we sold common stock. So we're going to credit common stock. But remember now what we do is we only put the par value into common stock and everything additional goes into a pick. Right? So in any time that you're going to set up a journal entry for selling common stock, this is how you should set it up debit, cash, credit, Common stock, credit a pick. Now if you sold it at par value, well, guess what? A pick would just be zero. So we would have no a pick and it would still balance right? Cash and common stock would have all the value. But what you're generally going to see is an amount in a pick. Okay. So let's go ahead and figure out what our cash amount is, what our common stock amount is and then a pick is just everything extra. Okay, so that's how you go about solving these. You want to find the total cash received the total amount of par value that goes to the common stock account and then everything extra is a pick. All right? So let's start with the cash amount. So cash is going to be the number of shares we sold times the price we sold them at. Right? We sold 500,000 shares and each share sold for $2. So what do we have 500,000 shares times the $2 selling price. Well, that means we received $1 million. Right? That should make sense. We sold 500,000 shares for $2. So we know the cash we received is gonna be one million here. So that's our debit to cash. One million. Now, what about the common stock account that's only gonna get the par value. So how much how much is going to go into the common stock account? Well, we sold 500,000 shares and each one has a 50 cent par value. So we have to do 500,000 times the 50 cent par value. So common stock That's gonna equal the 500,000 shares. We sold times the par value of 50 cents. And that comes out to 250,000, 250,000. That's what goes into the part of the common stock account is the par value. So here's our credit 250,000 to common stock and kind of squish squish them a little bit for space. So, common stock credit 250,000. So obviously, you can tell with some simple math what the a pick is gonna be. Right, we just have to plug it in. And that's always gonna be the total cash received. So cash received minus the common stock account, right? Whatever went into the common stock which was the par value. Right? So cash received of a million -250000 that went into common stock. That leaves us with 750,000 that goes into a pick. Right? And that's what's gonna balance out this equation. So, additional paid in capital is 750,000. All right. So this is this is always how we're gonna do it. We're only gonna store the par value in the common stock account and then everything extra goes to additional paid in capital. But notice these are both equity accounts. Right? So, our equity still went up by a million. Notice our cash, right? We received cash of one million. So our assets went up by one million. And our equity here. Well, the common stock account, I'm gonna put CS for common stock. That one got 250,000 and that was an increase to that account. And then a pick got 750,000, the amount above the par value. And that went up as well. So, the assets still equal liabilities plus equity. Right? The increase in assets equals the increase in equity. Same thing. We're just splitting up that value into the common stock account and a pick account. All right. Don't get too caught up with why we do it. Just joe just do it this way for now. Okay, in higher level courses, you'll start dealing with issues with Apec and things like that. But you don't need to get into it now. It's a very simple calculation when you just do it because you need to do it. All right. So, our cash went up by a million. Our equity went up by a million as well. Cool, let's go ahead and move on to the next video.