Three counts, no-par shares, and net of costs

Three counts that are easy to confuse

Prairie Sky’s articles of incorporation authorise an unlimited number of common shares — the Canadian norm — but suppose for this lesson they authorise 1,000,000. Authorisation is permission; it creates no entry and no asset. The company has issued 300,000 shares over its life, and because it has never bought any back, all 300,000 are outstanding — held by shareholders and entitled to vote and to dividends. The counts separate only when a company reacquires its own shares (lesson 4.7): issued stays at 300,000 while outstanding falls.

Canadian shares are normally no-par: the shares carry no nominal value, so the whole amount received is share capital. Par-value shares, still used in some jurisdictions and worth knowing for contrast, split the proceeds between a nominal par amount and the excess.

Worked example — a cash issue, net of costs

On 15 March Prairie Sky issues 50,000 common shares to the public at $18.00 each. The underwriter, lawyers and the exchange charge $25,000 in issue costs, deducted from the proceeds before the cash arrives. Gross proceeds are $50,000\times 18=900,000$; cash received is $875,000.

Dr Cash                 875,000
    Cr Common Shares            875,000

The costs of issuing shares are a cost of raising capital, not of running the business, so they are netted against the share capital rather than expensed. (IFRS deducts them from equity; ASPE lets a company either net them or expense them, and this course nets them.) Crediting Common Shares for the gross $900,000 and debiting an expense for $25,000 is the trap: it overstates share capital and understates income for the year.

If the costs had been paid separately a week later, the entry would simply be Dr Common Shares 25,000 / Cr Cash 25,000 — the same end result.

Shares for a non-cash asset

On 30 June Prairie Sky issues 15,000 shares to acquire a parcel of land. The land’s fair value, established by an independent appraisal, is $210,000; the shares were trading around $14 that day, implying $210,000 as well, but the appraisal is the more reliably measurable value. The transaction is recorded at fair value: Dr Land 210,000 / Cr Common Shares 210,000. There is no gain or loss on issuing shares — the company is receiving an asset, not selling one.

Par value, for contrast

A company with $1 par common shares issues 10,000 of them at $15. Only the par amount goes to the share account; the excess goes to Contributed Surplus (also called share premium):

Dr Cash                       150,000
    Cr Common Shares ($1 par)          10,000
    Cr Contributed Surplus            140,000

Total equity is the same $150,000 either way; the split is a legal artefact of par value. Under no-par shares — the Canadian case — the whole $150,000 would be credited to Common Shares.

Preferred shares

Prairie Sky also issues 5,000 preferred shares at $50 for $250,000: Dr Cash / Cr Preferred Shares. Preferred shares are a separate class with their own account; they carry a fixed dividend entitlement and priority on wind-up (lesson 4.1) but usually no vote.