 Hello and welcome to the session in which we will discuss the issuance of common stock. What is the big idea? Well issuance of common stock, it means when the company sells the stock to the public. So they sell a stock and whether they get in return, well they usually get money. Now we're going to see today that you may get something other than money, but usually this is how you raise money by selling common stock. So the company is selling stock to the public. What issues do we have to deal with from an accounting perspective? First we have something called power or state value stock that we have to deal with this. We have no power value stock. We have stock issued in non-cash transaction. It means you receive something other than cash when you issue the common stock and there is cost associated with issuing common stock. We have to deal with this and sometime the stock is issued in combination with other securities and here we have to learn about the proportional method and the incremental method which we'll talk about in the next session. So specifically I will not be covering this issuance of stock in the next session. Starting with is what is the power value stock? Well let me tell you what that is. The power value is an amount arbitrarily assigned to the stock. It's like basically your name. Someone gave you your name. It's an arbitrary name. Well it means something but it's arbitrary. You could be name Adam, Tony, George, any name that your parents decided to. So the amount could be a dollar, $2, $5, any amount. For example Apple stock power value is .00015, IBM .20, 20 pennies, Google .001. Now you might be asking why do we have to use power value stock? Well this concept is from the late 19th, early 20th century. It used to be. So notice the word used to be associated with the value of the stock. So basically it was kind of a contingent amount or a guaranteed amount. That's no longer the case because each state is different. What happened is companies choose low amounts as you just saw like Apple, IBM and Google to avoid any potential contingent liability. And what happened? Most state these days they follow something called the Model Act or the Model Business Corporation Act. I believe it's by the Association of American Bar Association ABA and it eliminate the power value concept. So simply put you're going to be giving the power value but all we need to know is it's an arbitrary amount assigned to the stock and we'll see how to deal with it from an accounting perspective. Let's start with an example. Let's assume my company issued sold 500 shares, $1 power value stock for $15,000. Simply put what does that mean? That means Farhad lectures needed $15,000 for business purposes. What do I do? I went to investors, I told them look I'll give you 500 of my shares, 500 shares. I'll give you 500 shares and you will give me in return $15,000 and now you are part of my company. You own 500 out of whatever number of shares I have. How do we, how do we journalize this entry? Well first I received $15,000 in cash. I debit cash $15,000. How much do I credit common stock? If you want to tattoo this on your hand, common stock is credited, tattoo this on your hand. Number of shares, so this number is number of shares times the par value. The par value is this arbitrary amount assigned to the stock, a dollar, I issued 500 shares. Now anything left goes into paid in capital and excess of par and that's $14,500. What you need to understand is this. Please separate the amount that they receive into the common stock and the paid in capital. How much the common stock, first you determine the common stock. The common stock is the number of shares times the par value of the stock. Anything left goes to paid in capital and excess of par. Let's assume far hat lectures issued 500 shares of $1, now stated value. So notice it's not par value, it's called stated value. If you hear the word stated or par from an accounting perspective, they mean the same thing, it means they get treated the same thing. What does that mean? Means I received, the company received $15,000 in cash. I credit common stock for also 500, which is the number of shares times the stated value. Then anything left is paid in capital and excess of stated value. Notice rather than saying par, I say stated, but everything else is the same. And the good news is later on we'll learn about preferred stock. Preferred stock is issued the same way. What does that mean? If I am talking about issuing preferred stock, which we'll talk about preferred stock later. If you know how to issue preferred stock, if you know how to issue common stock, all what's going to happen is we're going to be using rather than common. We'll be using preferred stock, but the accounting is the same. You whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. My motto is saving CPA exam candidate and accounting student one at a time. I provide you additional resources. I don't replace your CPA review course nor your accounting course. My resources are aligned with your material. So for example, I have specifically an intermediate accounting textbook. Also, they are aligned with your CPA review course such as Becker, Wiley, Roger and Gleam. I give you access to all the previously AI CPA questions, 1,500 CPA questions with detailed reviews. Don't shortchange yourself. Invest in yourself. Connect with me on LinkedIn. Take a look at my LinkedIn recommendation. Like this recording and share it with other connect with me on Instagram, Facebook, Twitter and Reddit. Let's take a look at a journal entry where we are dealing with no par stock. No par means, guess what? You remember that par is an arbitrary amount assigned to the stock? I don't want to assign any arbitrary amount. Why? Maybe I can avoid any contingent liability in that state. Just because it's an old rule, just let's go without any par value. So some states, what they do is they have a tax on these issues. Just want to make money basically. And it's considered, could be considered legal capital, which has reduced the dividend payability. So that's why some companies, they avoid issuing no par because it could be considered legal, it could be considered the full amount, could be considered the legal liability for the company. So what they do, they issue it with par, but they issue it in a very, very small amount. So let's assume Farhat Lectures issues 500, and we'll say issue that means sold, 500 shares for 15,000. That's easy peasy. Debit cash, credit common stock. Notice here, when we have no par, when we have no par, when par is not involved, you debit cash, credit common stock. Now let's discuss issuing stocks for non-cash transaction. What does that mean? It means the company gave out stocks and what they got in return is something other than cash. Some asset, not cash. If it's cash, it's easy. So how do we record these transactions when the company issues stocks and gets something else in return? Well, first, if we know the fair value of the stock issued, then that's easy. We'll go with that. So if I know the fair value of the stock, we'll base the transaction based on that. Or if I don't, I'm going to look at the fair value of the non-cash consideration. What am I receiving? Do I know the fair value of that amount? If that's the case, I will go with that. So Farhad Lectures issued 1,000 shares of its par value common stock to purchase an office space in downtown Philadelphia. The fair value of Farhad Lecture is $300. So I know the fair value of my stock. Well, if I gave someone 1,000 shares and we all know the fair value is 300, it means this office building is worth 300,000 because I assume the person that I'm dealing with is rational and they accepted the value of my stock. I credit common stock number of shares, 1,000 shares, times the par value. 1,000 times 1 equal to 1,000. Anything left is paid in capital and access of par common stock. Easy. Let's assume the same transaction except the fair value of my company is unknown because it's a private company. Well, we look at the fair value of the office building. The fair value of the office building is $275,000. It means if they accepted 1,000 shares of my stock and the fair value is $275,000, it's an equal transaction because we are both rational. The exchange has to be equal. So the transaction would look something like this. The office building is now recorded at $275,000. Common stock is 1,000 shares times a dollar, 1,000, and paid in capital what's left is $274,000. That's basically how it works. And always paid in capital, I forgot to mention this, it's basically the last transaction you do. It's basically the plug. For example, they could tell you that the fair value, they may not tell you the fair value, but the fair value could be discounted cash flow. So if they tell you the discounted cash flow is a certain amount, you will use that or sometime they tell you based on a professional appraisal. Well, if a professional appraisers are involved, then the professional appraisals will give you the fair value. Assuming you don't know the fair value of the stock that you are issuing. Let's talk about cost of issuing stocks because when a company issues stocks, you will incur a cost, it's not free, that will be easy. Companies will issue stocks and it's basically a free transaction. So first of all, what are costs of issuing stocks? Like what is considered that? Any cost incurred directly to sell the stocks, like what? Like before you can sell the stock, sometime you have to get an audit or to prepare financial statements specifically for selling the stock to give it to the new investors. Accounting fees, you have to file some paperwork legal fees. You have to ask a company to sell your stocks on the writing cost. Printing cost, that's not really any more used to print the stock certificate. Now you might have to print some brochures to give it to the clients. That's not really the case. You send them a PDF file now. You might have to pay certain taxes in the state in which you are operating as long as those are all related direct costs related to selling the stock itself. How do we deal with those costs? Well, guess what? Those costs are not expensed. How do we deal with them? They are a reduction in the amount of paid in capital. So we're going to reduce the amount paid in capital. Now make sure to differentiate between cost of issuing stocks and cost of issuing debt. Cost of issuing debt on the other hand is amortized, is expensed over the life of the bond. The cost of issuing stocks is considered a permanent part of the stock issuance. And the best way to look is to look at an example. So let's assume Farhat Lectures issued. I issued 10,000 shares of my $1 power value stock, $400,000. So I received $100,000 and I incurred, FL incurred $5,000 in those issuing costs. So let me show you the transaction. I'm going to debit cash, $100,000. Credit coming stock, 10,000. Number of shares times the power value should be 10,000. Let's copy it from the other slide. Paid in capital, nexus of power is $90,000. Excellent. Then I'm going to debit. Paid in capital, nexus of power, $5,000. Credit cash, $5,000. So what I did is that additional $5,000, rather than debiting an expense, I debited. I reduced my capital. Now obviously you're going to say, why doesn't he combine those two transactions? And sure, I can combine them. So simply put, when I combine those two, it comes out to IRC cash of $95. Common stock is 10,000 times 1. And paid in capital, nexus of power is $85,000. Again, this paid in capital is a plug. Okay, but basically here I had to reduce it by $5,000 by the amount of cash. Now what's the best way to do now? The best way is to go to farhatlectures.com and work MCQs on farhatlectures.com to learn more about this topic. At the end of this recording, if you are an accounting student, I strongly suggest you take a look at my website, farhatlectures.com. My motto is saving CPA candidate one at a time. Invest in yourself, invest in your career. Don't shortchange yourself. The CPA exam is a lifetime investment and you have to use it once. I don't replace your CPA review course. Good luck and study hard.