FAR · Select balance sheet accounts · 6 practice questions
Stock Issuance Costs: APIC and Noncash Stock Entries
APIC equals the value of shares issued minus par value and direct, incremental issuance costs. Below: a worked noncash issuance, its journal entry, and free practice on the same rule.
Try one first
Hint
Decide whether costs of issuing equity affect net income (expense), retained earnings (distribution), an asset, or contributed capital under U.S. GAAP.
Answer A. Under U.S. GAAP, costs directly attributable to issuing equity are recorded as a reduction of contributed capital (APIC). Gross proceeds are $2,000,000; after $200,000 of fees, cash increases by $1,800,000, common stock is credited for par ($100,000), and APIC increases by $1,700,000. These costs are not expensed, charged directly to retained earnings, or capitalized.
Why not B: Tempting because many transaction costs are expensed, but equity issuance costs under U.S. GAAP do not flow through operating expense; expensing them would improperly reduce net income and retained earnings instead of reducing contributed capital (APIC).
Why not C: Tempting because distributions reduce retained earnings, but issuance costs are not distributions to owners; GAAP requires a direct reduction of contributed capital (APIC), not a direct charge to retained earnings.
Why not D: Tempting because debt issuance costs are sometimes deferred and amortized, but equity issuance costs cannot be capitalized as an asset under U.S. GAAP and must reduce APIC.
Worked example
Cedar Co. issues 12,000 shares of $3 par common stock for a building. Its actively traded shares sell for $25 each on the issuance date. The building is appraised at $330,000. Cedar pays $12,000 cash for direct, incremental legal and registration fees. Calculate APIC and record the issuance.
| 1 | Measure the building using the quoted share price12,000 shares × $25 | $300,000 |
| 2 | Credit common stock at par12,000 shares × $3 | $36,000 |
| 3 | Calculate APIC before issuance costs$300,000 - $36,000 | $264,000 |
| 4 | Deduct direct issuance costs from APIC$264,000 - $12,000 | $252,000 |
APIC increases by $252,000; record Dr Building $300,000, Cr Cash $12,000, Cr Common Stock $36,000, and Cr APIC $252,000.
Check: Shortcut: APIC = 12,000 × ($25 - $3) - $12,000 = $252,000.
Key points
- Regular staff salaries are expensed because they would be incurred without the offering.
- Issuing a company's own shares creates contributed capital, not a gain or retained earnings.
- Total equity increases by consideration received minus direct issuance costs. Do not subtract par again.
How the exam traps you
- Expensing direct underwriting fees or leaving completed issuance costs in an asset account. Deduct direct and incremental issuance costs from APIC, not net income.
- Using the building's appraisal when the shares have a readily determinable market price. Use the quoted share price to measure the noncash issuance.
- Stopping at fair value minus par and forgetting issuance costs. Subtract direct and incremental issuance costs from APIC for both cash and noncash issuances.
Question 2
Hint
Work transaction-by-transaction: determine how each item affects APIC (issuances and small stock dividends increase APIC, issuance costs reduce APIC, treasury repurchases under the cost method do not change APIC).
Answer C. Compute APIC effects transaction by transaction. The March issuance increases APIC by (7 - 2) * 10,000 = $50,000. On Sept 1 outstanding shares were 110,000 (100,000 + 10,000), so a 10% small dividend required 11,000 shares and increases APIC by (8 - 2) * 11,000 = $66,000. Issuance costs of $6,000 reduce APIC; the treasury repurchase under the cost method does not change APIC. Net APIC = 60,000 + 50,000 + 66,000 - 6,000 = $170,000.
Why not A: This number correctly adds APIC from the March issuance and the small dividend but fails to subtract the $6,000 of direct issuance costs, which reduce APIC.
Why not B: Tempting because it treats the 10% dividend as 10,000 shares (10% of the beginning 100,000) rather than 11,000 shares (10% of the 110,000 outstanding after the March issuance), understating APIC from the dividend.
Why not D: This reflects misclassifying the 10% dividend as a large dividend recorded at par only (no APIC increase). In fact a 10% dividend is a small dividend measured at market, so APIC increases for the market-par difference.
Question 3
Hint
Focus on the limiting condition for stock issuance costs: only direct and incremental costs reduce paid-in capital.
Answer D. Under U.S. GAAP, direct and incremental costs of issuing equity (for example, SEC filing fees, outside legal fees, and printing costs) are recorded as a reduction of the proceeds and therefore reduce additional paid-in capital. Regular internal payroll for existing employees is not considered an incremental issuance cost because those salaries would be incurred regardless. Accordingly, such regular internal salaries are expensed as incurred rather than netted against paid-in capital.
Why not A: This is tempting because filing fees look like administrative costs, but SEC registration and similar outside issuance fees are direct, incremental costs of the offering and are recorded as a reduction of paid-in capital, not as a period expense.
Why not B: Candidates may overgeneralize that legal fees are always expensed, but when legal fees are directly attributable to the issuance, they are treated as issuance costs and deducted from the equity proceeds rather than recorded as an expense.
Why not C: Printing sounds like a routine operating cost, but printing that is directly incurred for the offering is a direct issuance cost and is charged against the proceeds (reducing paid-in capital) instead of being expensed.
Question 4
Hint
Separate the proceeds into the par value portion and the amount paid above par.
Answer A. Common stock is recorded at par: 8,000 shares × $5 par = $40,000. Total cash received is 8,000 × $18 = $144,000, so the excess over par is $104,000, which is recorded as additional paid-in capital. Issuing a corporation's own shares is an equity (contributed capital) transaction, no gain is recognized and it does not affect retained earnings.
Why not B: This assumes the entire proceeds are recorded in the common stock account. For par-value stock, common stock is recorded at par only; the excess over par is additional paid-in capital.
Why not C: Retained earnings arise from a company's accumulated net income less distributions, not from investor contributions. The amount paid in excess of par is contributed capital (additional paid-in capital), not retained earnings.
Why not D: A corporation does not recognize a gain when it issues its own stock; the excess over par is recorded within stockholders' equity as additional paid-in capital, not as income.
Question 5
Hint
Decide whether the shares' market price or the asset's appraised value is the more clearly determinable measure, and remember how issuance costs are reflected in equity accounts.
Answer B. Because the shares have a readily determinable market price, measure the equity issued at the market value of the shares: 30,000 × $18 = $540,000. Common stock is recorded at par value (30,000 × $2 = $60,000), so the excess (540,000 − 60,000 = 480,000) is initially credited to APIC. Issuance costs are charged against equity and reduce APIC, so subtract $40,000 to report APIC of $440,000.
Why not A: $480,000 equals the excess of the shares' fair value over par (540,000 − 60,000) and is tempting because it applies the basic APIC formula, but it is incorrect because it ignores the $40,000 of issuance costs, which under U.S. GAAP reduce APIC.
Why not C: $540,000 is the total fair value of the shares issued (30,000 × $18). This might lure candidates who conflate total consideration with APIC, but APIC is only the excess over par (and issuance costs further reduce APIC), so $540,000 is not the APIC balance.
Why not D: $500,000 could result from using the building's appraised value as the measure (600,000 − 60,000 − 40,000). It is incorrect because when a company's shares have a readily determinable market price, the equity issued should be measured by the shares' fair value rather than the asset's appraised value.
Question 6
Hint
Start with the total cash raised from the share sale, then consider how direct stock issuance costs affect equity under U.S. GAAP.
Answer D. Gross proceeds are 20,000 × $18 = $360,000. Under U.S. GAAP, direct stock issuance costs reduce paid-in capital rather than being expensed, so total equity increases by net proceeds: $360,000 − $24,000 = $336,000. The related equity credits would be Common Stock $40,000 (20,000 × $2) and Additional Paid-in Capital $296,000.
Why not A: $360,000 is the gross cash received from investors before issuance costs. Because the $24,000 of direct issuance costs reduce equity, the total increase in stockholders' equity is less than $360,000.
Why not B: $296,000 is the amount of Additional Paid-in Capital after subtracting par and issuance costs, but it omits the $40,000 credited to Common Stock. The question asks for the increase in total stockholders' equity, which includes both Common Stock and APIC.
Why not C: $320,000 equals gross proceeds minus par ( $360,000 − $40,000 ) and reflects ignoring the issuance costs. This is incorrect because issuance costs reduce paid-in capital under U.S. GAAP, lowering the net equity increase.
Common questions
Are stock issuance costs expensed or deducted from APIC?
Direct and incremental costs, such as offering-related legal, registration, and underwriting fees, reduce APIC. Regular internal salaries are expensed because they are not incremental.
How do you calculate APIC when issuing common stock?
APIC equals total consideration minus the shares' total par value minus direct, incremental issuance costs. Common stock equals shares issued times par value per share.
How do you value stock issued for a noncash asset?
Use the more clearly determinable fair value of the shares or the asset received. When the shares have a readily determinable market price, use that price rather than the asset's appraisal.
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