Definition
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.
Explanation
Companies will sometimes allow employees and investors to subscribe to both common and preferred shares of stock. Unlike stock that is sold for cash, subscription sales involve a commitment by the investor to purchase a number of shares and make periodic payments over time. Once the subscriber has made final payment, the company will issue to them the common or preferred stock.
Companies will typically offer shares on a subscription basis when it is about to go public, or wishes to increase ownership among a select group of employees. Stock sold in this manner is usually offered at a discount to its actual or estimated market value, and is typically free from sales commissions.
Companies use the following two special accounts to record transactions associated with subscribed shares:
Subscriptions Receivable: includes the amounts still to be collected from the employee or investor before the company will issue the shares.
Common or Preferred Stock Subscribed: includes the total price to be paid for the subscribed securities.
Example
In order to increase ownership among its employees, Company A offered them the opportunity to purchase 500 shares of common stock with a par value of $1.00 at $18.00 per share. Employees were asked to pay 10% up front, with the remainder to be paid six months later. Twenty employees of Company A agreed to subscribe to this offer.
The total subscription receivable associated would be calculated as:
= $18.00 per share x 500 shares x 20 employees, or $180,000
The initial journal entry to record the issuance of this stock is as follows:
Debit | Credit | |
Subscriptions Receivable | $180,000 | |
Common Stock Subscribed | $10,000 | |
Paid-in Capital in Excess of Par | $170,000 |
The journal entry to record the 10% paid up front by employees would be:
Debit | Credit | |
Cash | $18,000 | |
Subscriptions Receivable | $18,000 |
When the employees provide the balance owed after six months, the journal entry to record the transaction would be as follows:
Debit | Credit | |
Cash | $170,000 | |
Subscriptions Receivable | $170,000 |
Finally, a journal entry is required to record the issuance of the common stock.
Debit | Credit | |
Common Stock Subscribed | $10,000 | |
Common Stock | $10,000 |
Related Terms
par value, par value stock, no-par stock