Stockholders' Equity: Classes of Capital Stock

The corporation

Capital stock issued for property or services

When issuing capital stock for property or services, companies must determine the dollar amount of the exchange. Accountants generally record the transaction at the fair value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident.

To illustrate, assume that the owners of a tract of land deeded it to a corporation in exchange for 1,000 shares of USD 12 par value common stock. The firm can only estimate the fair market value of the land. At the time of the exchange, the stock has an established total market value of USD 14,000. The required entry is:

Land (+A) 14,000
Common Stock (+SE) 12,000
Paid-In Capital in Excess of Par Value – Common (+SE) 2,000
To record the receipt of land for capital stock.

As another example, assume a firm issues 100 shares of common stock with a par value of USD 40 per share in exchange for legal services received in organizing as a corporation. No shares have been traded recently, so there is no established market value. The attorney previously agreed to a price of USD 5,000 for these legal services but decided to accept stock in lieu of cash. In this example, the correct entry is:

Organization Costs (+A) 5,000
Common Stock (+SE) 4,000
Paid-In Capital in Excess of Par Value – Common (+SE) 1,000
To record the receipt of legal services for capital stock.

The company should value the services at the price previously agreed on since that value is more clearly evident than the market value of the shares. It should debit an intangible asset account because these services benefit the corporation throughout its entire life. The company credits the amount by which the value of the services received exceeds the par value of the shares issued to a Paid-In Capital in Excess of Par Value – Common account.