Lump-Sum Stock Issuance
A corporation may issue different types of stocks in a single transaction in exchange of a lump-sum of cash or other assets or services. For example, common stock and preferred stock may be issued in exchange of a single sum of cash or machinery. To record such transactions it is necessary to determine the portion of lump-sum cash or the value of property obtained to be allocated to each class of stock.
Usually the lump-sum amount is apportioned to each class of stock issued on the basis of the market values of each class of stock. This method is called the apportionment method. It uses the following formula to calculate the amount of lump-sum to be allocated to each class of stock:
|Apportionment =||A||× C|
A is the market value of a particular class of stock issued for lump-sum;
B is the total market value of all the stocks issued for lump-sum; and
C is the lump-sum cash received or, in case of some other asset or service, its fair market value.
When two classes of stocks have been issued for a lump-sum and the market value of one class is known and that of the other is unknown, then the incremental method should be employed. According to incremental method, the portion of lump-sum equal to the stock's market value would be allocated to that class of stock and rest will be allocated to the other class.
Once the amount to be apportioned to each class of stock is calculated, the issuance of stocks is recorded via separate journal entries for each class of stock in such a way as if there had been separate transactions for each class of stock. This is illustrated the following example:
A company issued 3,000 shares of $6 par value common stock and 1,000 shares of $10 par value preferred stock for a lump-sum of $56,000. On the day of issuance of the stocks for lump-sum, the market values per share of common stock and preferred stock were $10 and $20 respectively.
Apportion the lump-sum to common stock and preferred stock.
|Common Stock||$30,000||3/7 × $56,000 = $24,000|
|Preferred Stock||$40,000||4/7 × $56,000 = $32,000|
|Additional Paid-In Capital||6,000|
|Additional Paid-In Capital||12,000|
by Irfanullah Jan, ACCA and last modified on