Date: April 23,2013
Subject: Accounting treatment for share issue costs
As you requested, I have researched the accounting issue, regarding the proper accounting treatment for the share issue costs. I hope this recommendation will be of assistance to you.
Share issue cost:
A corporation may incur miscellaneous costs that are related directly to issuing its capital stock. When related to the initial issuance of stock at incorporation, the corporation records these costs as an expense. On the other hand, the costs related to later issuances of stock are considered to be normal financing expenditures and reduce the proceeds from the issuances. When a corporation incurs these costs, it reduces additional paid –in capital for the amount of the costs.
Debt Issue cost:
Are recorded separately and are amortized over the term to maturity. U.S GAAP requires a debit to an asset account –debt issue costs. The asset is allocated to expense, usually on a straight –line basis.
IBR sold additional hares of its $10.00 par common stocks. Therefore, since the issuance of these shares was established after incorporation, these costs are considered to be normal financing expenditures and reduce the proceeds for the issuances. These shares would be classified as share issue costs and not debt issue costs.
Amount at Which the Shares Sold To the Public
In order to calculate this amount the net proceeds of $53,200,000 must be divided by the number of shares issue, 2,395,000. This will result to $22.21 per share. Therefore, the total amount at which the shares sold to the public were $55,085,000 and the net proceeds of $53,200,000 is equal to the issue costs of 1,885,000. This means after the share issue costs were deducted in theory each share was sold for an estimate of .79 cents less then the original market price of $23 per share.
Journal Entries to record the Sale of Shares