ASC 505-10: Equity Issuance Costs & Journal Entries
Posted In | ASC Education | Gridlex AcademyWhen companies issue equity securities to raise capital, they often incur costs associated with the issuance process. ASC 505-10, Equity - Overall, provides guidance on the accounting treatment of equity issuance costs in a company's financial statements. This article explains equity issuance costs transactions under ASC 505-10, along with illustrative journal entries.
Understanding Equity Issuance Costs
Equity issuance costs are the expenses a company incurs during the process of issuing equity securities. These costs may include legal fees, underwriting fees, registration fees, and other expenses related to the issuance process. Under ASC 505-10, equity issuance costs are treated as a reduction of the proceeds from the equity issuance and are recorded as a direct reduction of the related equity account.
Key Steps in Accounting for Equity Issuance Costs under ASC 505-10
1. Determine the total amount of equity issuance costs.
2. Allocate the equity issuance costs to the related equity accounts.
3. Record the equity issuance costs as a reduction of the related equity accounts.
Journal Entries for Equity Issuance Costs Transactions
To illustrate the journal entries for an equity issuance costs transaction, let's assume a company issues 100,000 common shares with a par value of $1 per share and incurs $50,000 in equity issuance costs.
1. Record the issuance of common shares:
Dr. Cash $100,000 (100,000 shares x $1 par value)
Cr. Common Stock $100,000
2. Record the equity issuance costs as a reduction of the related equity account:
Dr. Common Stock $50,000
Cr. Cash $50,000
Please note that some companies may choose to record equity issuance costs in a separate contra-equity account (e.g., "Equity Issuance Costs") rather than directly reducing the related equity account. In this case, the journal entry would be:
Dr. Equity Issuance Costs $50,000
Cr. Cash $50,000
ASC 505-10 provides guidance on the accounting treatment of equity issuance costs in a company's financial statements. By understanding the key steps and journal entries involved in accounting for equity issuance costs, companies can accurately reflect the financial impact of these costs in their financial statements. Proper accounting for equity issuance costs helps maintain transparent financial reporting and enables stakeholders to make informed decisions about a company's financial position and performance.