Discuss why firms may issue capital stock (preferred or common) for cash or for noncash assets. Discuss the issuance of capital stock for services received
ISSUING CAPITAL STOCK
Firms may issue capital stock (preferred or common) for cash or for noncash assets. Some
issuances of common stock result from various option arrangements.
Issue for Cash
Firms usually issue shares for cash at the time of their initial incorporation and at periodic intervals as they need additional shareholder funds. Firms sometimes issue shares to employees as compensation. The issue price for preferred stock usually approximates its par value. Firms generally issue common shares, both at the time of initial incorporation and in subsequent years, for amounts greater than par (or stated) value. The firm credits the excess of issue proceeds over par (or stated) value to the Additional Paid-In Capital account.
Issue for Noncash Assets
Firms also issue common stock for assets other than cash, for example, to acquire another firm. The firm records the shares exchanged for noncash assets at the fair value of the shares given or, if the firm cannot make a reasonable estimate, at the fair value of the assets received.
Issue for Services Received
If a firm issues common stock in return for services other than from employees, the firm records the transaction at the fair value of the services received if it can more reliably measure this amount. Otherwise, the firm records the transaction at the fair value of the shares issued.
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