11) Why is there a large difference between share value and stockholders’ equity?

There can be many reasons why the market value of a corporation’s stock is much greater than the amount of stockholders’ equity reported on the balance sheet. Let’s start by defining stockholders’ equity as the difference between the asset amounts reported on the balance sheet minus the liability amounts. Next, the accountant’s cost principle requires that only the cost of items purchased can be reported as an asset. This means that valuable trade names that were never purchased (but were developed over time) are not reported on the balance sheet. The same holds for a great management team and an amazing reputation. The cost principle also means that many long-term assets are reported at cost (and not at their current higher market value). Many plant assets are reported at minimal amounts because their costs have been reduced by the cumulative amount of depreciation taken over the years.

Other factors contributing to a high market value might be a corporation’s earnings and dividends that are consistently growing and/or a special niche for its products or services that is recognized by the market.

Lastly, a corporation’s stockholders’ equity may have been reduced from the purchase of treasury stock at a high cost.

Issuance of No Par Stock Example

A company received $34,000 for issuing 10,000 shares of common stock of $3 par value. Pass the journal entry to record the issuance of shares.

Journal Entry

Cash	34,000
Common Stock		30,000
Additional Paid-In Capital		4,000

12) Issuance of Shares for Non-Cash Items

Corporations usually issue shares in exchange of cash or cash equivalents since cash can be used to purchase other assets or services. However shares may be issued in exchange of non-cash assets or services if the company actually needs them. For example shares may be issued to the supplier of machinery as purchase price and to attorneys as legal fee.

Generally such transactions of share issuance are recorded at the fair market value of the shares or the non-cash assets/services which ever can be determined more reliably. The determination of fair market value is the right of the board of directors of the company and they may obtain services of professional appraisers for to determine the fair market value.

Example

A company issued 1,000 shares of common stock of $10 par value to its attorney as a consideration for legal services received by the company. The total fair market value of the shares, which was $9,800 at the time of issuance of shares, is to be used as the basis for valuation of the legal services.

Pass a journal entry to record the issuance of shares for non-cash consideration.

Journal Entry

Legal Expense	9,800
Common Stock		10,000
Additional Paid-In Capital		200