BUS103: Introduction to Financial Accounting

Each share of common or preferred capital stock either has a par value or lacks one. The corporation's charter determines the par value printed on the stock certificates issued. Par value may be any amount – 1 cent, 10 cents, 16 cents, USD 1, USD 5, or USD 100. Low par values of USD 10 or less are common in our economy.

As previously mentioned, par value gives no clue as to the stock's market value. Shares with a par value of USD 5 have traded (sold) in the market for more than USD 600, and many USD 100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws permit. Par value gives the accountant a constant amount at which to record capital stock issuances in the capital stock accounts. As stated earlier, the total par value of all issued shares is generally the legal capital of the corporation.

To illustrate the issuance of stock for cash, assume a company issues 10,000 authorized shares of USD 20 par value common stock at USD 22 per share. The following entry records the issuance:

Notice that the credit to the Common Stock account is the par value (USD 20) times the number of shares issued. The accountant credits the excess over par value (USD 20,000) to Paid-In Capital in Excess of Par Value; it is part of the paid-in capital contributed by the stockholders. Thus, paid-in capital in excess of par (or stated) value represents capital contributed to a corporation in addition to that assigned to the shares issued and recorded in capital stock accounts. The paid-in capital section of the balance sheet appears as follows:

When it issues no-par stock with a stated value, a company carries the shares in the capital stock account at the stated value. Any amounts received in excess of the stated value per share represent a part of the paid-in capital of the corporation and the company credits them to Paid-In Capital in Excess of Stated Value. The legal capital of a corporation issuing no-par shares with a stated value is usually equal to the total stated value of the shares issued.

To illustrate, assume that the DeWitt Corporation, which is authorized to issue 10,000 shares of common stock without par value, assigns a stated value of USD 20 per share to its stock. DeWitt issues the 10,000 authorized shares for cash at USD 22 per share. The entry to record this transaction is:

The paid-in capital section of the balance sheet appears as follows:

DeWitt carries the USD 20,000 received over and above the stated value of USD 200,000 permanently as paid-in capital because it is a part of the capital originally contributed by the stockholders. However, the legal capital of the DeWitt Corporation is USD 200,000.

A corporation that issues no-par stock without a stated value credits the entire amount received to the capital stock account. For instance, consider the DeWitt Corporation's issuance of no-par stock. If no stated value had been assigned, the entry would have been as follows:

Since the company may issue shares at different times and at differing amounts, its credits to the capital stock account are not uniform amounts per share. This contrasts with issuing par value shares or shares with a stated value.

To continue our example, the paid-in capital section of the company's balance sheet would be as follows:

The actual capital contributed by stockholders is USD 220,000. In some states, the entire amount received for shares without par or stated value is the amount of legal capital. The legal capital in this example would then be equal to USD 220,000.