COMMON STOCK & TREASURY STOCK
COMMON STOCK – the basic voting stock issued by a corporation to stockholders.
AUTHORIZED SHARES – the maximum number of shares of capital stock of a
corporation that can be issued, as specified in the charter.
ISSUED SHARES – the total number of shares of stock that have been sold.
OUTSTANDING SHARES – issued shares that are currently held by stockholders other
than the corporation itself.
PAR VALUE – a nominal value per share established in the corporate charter – is a
token amount and has no relationship to the market value of the stock.
NO-PAR VALUE – does not have a specific legal value per share.
ISSUANCE OF STOCK (IPO) – An initial public offering involves the very first sale
of a company’s stock to the public.
Example: A company issued 3 million common stock shares, at $30 per share, par value
$1 per share, in an IPO. The entry to record this sale is as follows:
Cash $90,000,000
Common Stock
(3,000,000 x $1.00(par value)) $3,000,000
Additional Paid-In Capital
(3,000,000 x $29.00 (issued price – par value)) $87,000,000
# of shares outstanding – 3,000,000
REPURCHASE OF STOCK (treasury stock) – A corporation may want to repurchase
its stock from existing shareholders for a number of reasons:
To send a signal to investors that the company itself believes its own stock is worth
purchasing.
To obtain shares that can be reissued as payment for purchases of other companies.
To obtain shares that can be reissued to employees as part of employee stock plans that
provide workers with shares of the company’s stock as part of their pay.
Example: A company repurchases 1 million common stock shares for $35 per share.
The entry to record this transaction is as follows:
Treasury Stock
(1,000,000 x $35.00) $35,000,000
Cash
(1,000,000 x $35.00) $35,000,000
# of shares outstanding – (3,000,000 – 1,000,000) = 2,000,000
