Definition
The term lump-sum sale of securities refers to common stock issued by a company in combination with other securities such as preferred stock or bonds. When one company acquires another, it oftentimes combines two or more securities as part of the purchase price. Companies can use the proportional or incremental methods to allocate the purchase price to each class of security on its balance sheet.
Explanation
Normally, companies will sell common stock, bonds, and preferred shares separately. This allows the company to accurately allocate the proceeds received to each class of security on its balance sheet. Occasionally, a company will bundle two or more classes of securities in exchange for a lump sum payment of cash or even an asset. A lump-sum sale of securities oftentimes occurs when one company acquires another.
Transactions involving a lump-sum sale present the company with an accounting challenge, since the proceeds from the sale must be allocated to each class of security on the company's balance sheet. Generally, there are two methods a company can use to calculate this allocation:
Proportional Method: if the fair market value of each type of security is known, the lump sum received is allocated to each class of security based on its proportion of the total.
Incremental Method: if the fair market value of each type of security is not known, the lump-sum received is first allocated to those securities that have a known market value, while the remainder of the lump-sum is allocated to those securities with an unknown value.
Related Terms
- The financial accounting term par value is used to describe the stated, or printed, value of a security. Par values can be assigned to bonds as well as common and preferred stocks.
Moneyzine EditorSeptember 20th, 2023 - The term par value stock refers to the accounting value assigned to a share of common stock, and is also referred to as its stated value or face value. The par value of common stock has no relationship to the market value of the security.Moneyzine EditorSeptember 20th, 2023
- The term no-par stock refers to shares of common stock that are issued with no par value. The par value of common stock has no relationship to the market value of the security, and the term refers to a price indicated on the stock certificate.Moneyzine EditorSeptember 20th, 2023
- The term subscribed stock refers to common and preferred shares sold to investors and employees over time using a process that involves installment payments. When an employee or investor agrees to purchase shares of stock on a subscription basis, the company will issue shares once it receives the final payment of the balance owed.Moneyzine EditorSeptember 21st, 2023
- The term proportional method refers to an approach used to allocate a lump-sum sale to one or more classes of securities. If the fair market value of each type of security is known, the proportional method calls for the allocation of the proceeds to each class of security based on its proportion of the total.Moneyzine EditorSeptember 21st, 2023
The term incremental method refers to an approach used to allocate a lump-sum sale to one or more classes of securities. If the fair market value of a security is unknown, the incremental method requires the proceeds from the sale to first be allocated to those securities with a known market value; the remainder is then allocated to the security with an unknown value.Moneyzine EditorJanuary 22nd, 2024
