A business has been incorporated and shares of common stock will be issued to the owners based upon predetermined percentages of ownership. The owners have not contributed any equity to start the corporation. It is being funded through a loan. How would the issuance of common stock be recorded since the stock is being issued with no consideration being received for the stock.?
Accounting Entry for Issuance of Common Stock
Answers
Since A=L& E, and there is no Equity
debit cash for loan
credit payable
credit Common stock @ par
debit Paid in excess of Par
Total Equity $0
Just a note. Many states will not allow you to issue stock at lower than par value. You will want to check with your legal counsel as to the state requirement. In the case where the stock is issued for par, the debit would "common stock subscribed" as a receivable from the shareholder for the par value (you can't own it legally without paying for it). That said, you can make the par value so low that it amounts to a minimal payment. In any case, if no cash or other tangible value is given for the stock, equity is zero. You just have shares outstanding and 0 equity.
There has to be some consideration paid for the stock even if minimal and could be simply the amount required to float the company formation (registration and filing fees!). As an alternative to finding cash at a start-up stage, it might also be reasonable for the founders to contribute their business plan, non compete, and other intangibles which could be shown as an intangible asset in the opening BS.
Regardless of the fact that these founders dreamed up the business and formed the company as a team, remember to consider restricted stock purchase agreement with Company right to buy back unvested stock in the event of termination (usually over four years. During the formative years THERE WILL BE departures from the team, voluntary or otherwise as a result of pressures, differing abilities to stand the stress and financial commitments, etc.!
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FP&A