| (a) Unissued Capital Stock | 250,000.00 | ||
| Capital Stock Authorized | 250,000.00 | ||
| (b) Subscribers | 150,000.00 | ||
| Capital Stock Subscriptions | 150,000.00 | ||
| (c) Cash | 150,000.00 | ||
| Subscribers | 150,000.00 | ||
| (d) Capital Stock Subscriptions | 150,000.00 | ||
| Capital Stock | 150,000.00 | ||
| (e) Capital Stock Authorized | 150,000.00 | ||
| Unissued Capital Stock | 150,000.00 | ||
Entry (a) is a memorandum entry recording the amount of capital stock authorized by the corporation’s charter. This entry has little or no financial significance. Not until stock is sold does the corporation have any real assets.
Entry (b) shows that of the stock which was unissued under entry (a), $150,000, has been subscribed for, thus giving the corporation a legally enforcible claim—an asset—for that amount.
Entry (c) is self-explanatory.
Entry (d) shows the issue of the stock when the subscriptions are paid.
Entry (e) adjusts the memorandum entry (a), to show the present amount of authorized stock still unissued, viz., $100,000. Both accounts under (a) continue as memoranda only, and as they exactly offset each other, they will not appear on the balance sheet.
Third Method.
This method also makes use of memorandum accounts before the sale of the stock. The difference between this and the second method should be noted. It will be seen that the credit of entry (a) is here Capital Stock instead of Capital Stock Authorized. This is theoretically incorrect because as yet the corporation has no proprietorship. The best that can be said for it is that the debit represents a contingent asset and the credit a contingent proprietorship item. The other entries are self-explanatory.
| (a) Unissued Capital Stock | 250,000.00 | ||
| Capital Stock | 250,000.00 | ||
| (b) Subscribers | 150,000.00 | ||
| Subscriptions | 150,000.00 | ||
| (c) Cash | 150,000.00 | ||
| Subscribers | 150,000.00 | ||
| (d) Subscriptions | 150,000.00 | ||
| Unissued Capital Stock | 150,000.00 | ||
Premium or Discount on Stock.—The law requires that when stock of par value is issued, the Capital Stock account must be carried always at par. When stock is sold at a premium or at a discount, it necessitates, therefore, the use of supplementary proprietorship accounts to make the proper record. In the state of New York, a corporation cannot sell its stock at a discount, but in states where this is allowed the amount of such discounts should be charged to a “Discount on Stock” or some similar account. Sometimes the charge is made to “Organization Expense.” The use of Organization Expense account for this purpose is contrary to the principle that the account title should show the exact nature of the items recorded under it. It is misleading and sometimes reprehensible. A full discussion of this matter is given in Volume II. When stock is sold above par, the amount of the premium is recorded in the account “Premium on Stock,” which as usually handled constitutes a part of the permanent capital of the corporation. Premiums on stock sales should not be credited to Surplus account. The following illustration will show the kind of entries required: