Journal entry for issuance of preferred stock

Introduction

Sometimes, we may need to issue the preferred stock in addition to the common stock in order to have more inventors to invest in our company. In this case, we need to make the journal entry for the issuance of the preferred stock which is similar to the common stock transaction.

Preferred stock is a type of stock that has some preference over the common stock. Specifically, shareholders of the preferred stock receive the dividend before the common stockholders.

Additionally, in the event of liquidation, preferred stockholders will also receive the distribution of the assets before the shareholders of common stock. However, shareholders of preferred stock generally do not have the voting right in the company.

We may issue the preferred stock at par value or at a price that is higher than the par value. In any case, the journal entry for issuance of preferred stock will increase both total assets and total equity on the balance sheet in the same amount.

Journal entry for issuance of preferred stock

Issuance of preferred stock at par value

We can make the journal entry for issuance of preferred stock at par value by debiting the cash account and crediting the preferred stock account.

In this journal entry, both total assets and total equity on the balance sheet increase by the amount that we issue the preferred stock for. This journal entry is straightforward as we do not have an excess amount over the par value for the issuance of the preferred stock to the shareholders.

Issuance of preferred stock at price higher than par value

It is a common occurrence that we may issue the preferred stock at a price that is above its par value. if this is the case, we need to account for the excess amount as additional paid-in capital of the preferred stock.

Likewise, we can make the journal entry for the issuance of preferred stock at a price higher than the par value by crediting the excess amount into the additional paid-in capital account of the preferred stock as below:

Issuance of preferred stock example

For example, on January 31, we issue 10,000 shares of preferred stock for $150,000. The preferred stock that we issue has a par value of $10 per share.

In this case, we can make the journal entry for issuance of 10,000 shares of the preferred stock by debiting the $150,000 into the cash account and crediting the $100,000 amount and the $50,000 amount into the preferred stock account and the additional paid-in capital account of the preferred stock respectively.

In this journal entry, the $100,000 of the preferred stock is the amount of the preferred stock at its par value which comes from the 10,000 shares multiplying with the $10 per share of the par value. At the same time, the $50,000 of the additional paid-in capital here is the excess amount that we issue the preferred stock at the price of $15 per share ($150,000 / 10,000 shares) above its par value of $10 per share.

Issue the preferred stock for the non-cash assets

Even though the preferred stock is usually issued for cash, we may also come across the situation where the preferred stock is issued for the non-cash assets.

In this case, we can make the journal entry for the issuance of the preferred stock for the non-cash asset by debiting the non-cash asset account instead of the cash account and crediting the preferred stock account and the additional paid-in capital account as below:

For example, on January 31, we purchase office equipment for $15,000 from one of the vendors that we have a close business relationship. However, instead of paying the vendor in cash, we pay our vendor with 1,000 shares of the preferred stock instead. And our preferred stock has a par value of $10 per share.

In this case, we can make the journal entry for purchasing the $15,000 office equipment with the 1,000 shares of preferred stock as below: