Financial Accounting: In an Economic Context

ACCOUNTING FOR COMMON AND PREFERRED STOCK ISSUANCES

As with preferred stock, common stock issuances must be authorized in the corporate charter and approved by the board of directors and sometimes the shareholders. Similarly, the number of shares of common stock outstanding may differ from the number of common shares originally issued. As of December 31, 2008, for example, the corporate charter and shareholders of Johnson & Johnson had authorized over 4 billion shares of common stock, over 3 billion shares had been issued, and over 2.7 billion shares were currently outstanding—approximately 350 million shares had been repurchased by the company and were held in the form of treasury stock.

5. In some states the concept of stated value was substituted for par value, but like par value, this concept has limited economic meaning. Note, however, that state laws differ in this area.

The methods used to account for common stock issuances are essentially the same as those used for preferred stock. When no-par common or preferred stock is issued for cash, the cash account is debited for the proceeds and the common (or preferred) stock account is credited for the entire dollar amount. For example, when Apple Computer, Inc. issued 4.98 million shares of no-par common stock for an average price of $17.592 per share (total cash proceeds of $87.61 million), the company recorded the following journal entry (dollars in millions):

When common or preferred stock with a par value is issued for cash, ...