Issuance of Preferred Stock Journal Entry

Overview

The company may sometimes need to issues preferred stock to finance its business instead of raising the debt. In this case, the company needs to properly account for the preferred stock as the journal entry may include the additional paid-in capital that comes from the difference between par value and the stock price.

Preferred stock is the type of stock that has no voting right in the company. However, this type of stock has a preferable status where the shareholders of the preferred stock have a priority to distributions of earnings (i.e. dividends) and assets in event of liquidation over the shareholders of the common stock.

Issuance of preferred stock journal entry

The company can make the journal entry for the issuance of the preferred stock for cash by debiting the cash account and crediting the preferred stock account and paid-in capital in excess of par-preferred stock.

Account	Debit	Credit
Cash	$$$
Preferred stock		$$$
Paid-in capital in excess of par-preferred stock		$$$

In this journal entry, both total assets and total equity in the balance sheet increase by the same amount of the proceed receiving from the sale of preferred stock. Similar to the issuance of the common stock, the difference between the stock price and the par value is recorded in the additional paid-in capital account.

However, when the corporation has more than one type of stock, the additional paid-in capital account should be broken down in order to identify the type of stock it belongs to. Likewise, the account of “paid-in capital in excess of par-preferred stock” in the journal entry above is the type of additional paid-in capital.

Example

For example, the company ABC issues 10,000 of preferred stock for cash at the price of $15 per share. The preferred stock has a par value of $10 per share.

In this case, the company ABC can make the journal entry for the issuance of preferred stock as below:

Account	Debit	Credit
Cash	150,000
Preferred stock		100,000
Paid-in capital in excess of par-preferred Stock		50,000

In this journal entry, both assets and equity in the balance sheet increase by the same amount of $150,000.

As the preferred stock has a preferable status in the company, it is usually presented first before the common stock in the balance sheet. Likewise, the $100, 000 of preferred stock here will be presented first in the equity section of the capital stock.