3. Issuance of Stock

Let's talk about the issuance of stock. We talked about in the intro video that for an individual stock, part of it is allocated to par value, and the rest of it is above par, which is something we call additional paid-in capital. So you have your par value set at something, and then anything above and beyond that is your additional paid-in capital. And the selling price up here, this $50, this is just whatever it's going for on the market. So the selling price could be 50, could be 51, could be 49. It could just go up and down. Now, the problems that you're gonna see are something like this.

Sold 1,000 shares of $1 par for $15. This is what the problem is gonna look like, and it's gonna say, "Record the journal entry." And the first thing I like to do is say, "Well, how much cash am I getting?" If I sold 1,000 shares at $15, then I'm getting 15,000 cash. So let's start there. Cash goes up by 15,000. Now, for these shares of stock, we need to split it up between par and APIC. So this 15,000 is gonna be split out into some amount for par and some amount for APIC.

And the way we do that is we just say 1,000 shares times $1 par. Easy enough. $1,000 goes to par, and we put that in the common stock account, and that's $1,000. And then whatever's left, whatever is the additional, the leftover, that goes into the APIC account. And you could calculate that by saying $15 market price minus $1 par value equals $14 per share of APIC. $14 per share times 1,000 shares is $14,000 of APIC. That's totally legit. I just think it's much easier to fill out the journal entry. Put the par value in, and then the APIC is whatever was missing.

What if you're presented with a problem where someone doesn't pay cash for the stock? If you have a problem where you're purchasing land with stock, let's say you purchase land for 10,000 shares of common stock, and it is a $1 par common stock. The fair market value of the land is $300,000, but the stock is traded daily at $35. Now we have kind of a problem, because we purchased land and the fair market value of that land is 300,000. The fair market value of that stock is 35 times 10,000, or 350,000.

So what do we do? Do we use the fair market value of the land or do we use the fair market value of the stock? And you want to use whichever one is more accurate. And how do you define accurate? Well, whichever one has the most fluid market, whichever one is being repriced more often. So here we're saying that the stock is traded every day, so the stock is being repriced all the time. The market forces are repricing this stock every single day, and its most current price is $35. The fair market value of this land, this land isn't being traded every single day.

So in this case, the stock is the more accurate representation of fair market value. If this had instead said the stock traded yearly, so it's very infrequently traded, that's what you wanna look out for. If the stock is infrequently traded, use the fair market value of the asset. But if it's frequently traded, then use the fair market value of the stock. You're either gonna have the stock value the asset, or you're gonna have the asset value the stock.

Whichever one has a better market representation. So here, because this didn't originally say yearly, because this said daily, we're gonna use the stock to value the asset. So that ends up looking like this. We say that the land is actually worth 350,000, 'cause we had a $35 market price times 10,000 shares to give us 350,000. These shares have a $1 par value, and they sold for 35. So our stock looks something like this. We've got $1 in par and 34 in APIC. So for common stock, we have 1 times 10,000, or 10,000.

Now for APIC common stock, we have whatever's left over. We have the 340,000, and that's just 34 times 10,000 shares, where par was 1 times 10,000 shares. 350 equals 350, and we're good. The thing to look out for on this one is make sure that you're looking to see how often this stock is traded. If it's traded pretty frequently, use the stock value. If it's traded infrequently, use the fair market value of the asset. Let's just do one real fast and assume this is traded very infrequently. Then this journal entry would look a little bit different. It would say land 300, because that's the fair market value of the land.

Common stock in at par, still 10,000 shares, still $1 par. The APIC would be the only thing that's different. We would then say 300 less 10 gives us 290 additional paid-in capital. In this one, we're basing everything off the fair market value of the land versus basing everything off the fair market value of the stock.