When a corporation sells shares of par value common stock for common stock is credited for?
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Stock that is not assigned a par value or face value Show What is No-Par-Value Stock?No-par-value stock is a stock that is not assigned a par value or face value. It is also known as no-par stock. The minimum price at which a class of share can be traded on the initial offering is called the par value of that share. Whenever a business is incorporated, the corporate charter may or may not assign a par value for the shares to be issued by the company. The face value of a stock is printed on the certificate provided by the company at the time of issuance. When it does not assign a base value or par value, it results in a no-par-value stock. The price is determined by the investors in the open market. Summary
Reasons for Issuing No-Par-Value StocksCompanies issue and investors accept no-par value stocks because of the following reasons:
Accounting Entry of Par Value and No-Par-Value StocksState laws may or may not require corporations to have a par value on the issued common stocks. In case corporations have assigned par value to the common stocks, the proceeds will be credited to two accounts of shareholder’s equity. The common stock account will be credited for the amount up to the par value amount of the shares sold. Any amount paid by the investor in excess of the par value amount of the stock would be credited to the additional paid-in capital account. The accounting entry will be a debit to cash, a credit to the common stock account, and a credit paid-in capital for the excess of par value amount. If a company has sold no-par-value stocks, the proceeds from the transaction will be credited to the common stock account only. Hence, the accounting entry will be a debit to cash and credit to the common stock account. For example, a company issues 150 common shares for $3,000, with each share having a $0.50 par value. The accounting entry is a debit of $3000 to the cash account and a credit of $0.50 * 150 = $75 to the common stock account and a credit of $2,925 ($3,000 – $75) to the paid-in capital account. Therefore, the cash account increases by $3,000, and the shareholder’s equity also increases by an aggregate of $3000 ($75 + $2,925). In case the company issues 150 no-par-value stocks, the accounting entry is a debit of $3,000 to a cash account and a credit of $3,000 to a common stock account. The above implies that whether the shares are issued with par value or not, in both cases, the shareholder’s equity and the cash account increase by $3,000. However, a par-value stock increases the liability of a company if the stock price drops drastically. More ResourcesCFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
What does it mean when the common stock of a corporation has a par value?Par value is the value of a single common share as set by a corporation's charter. It is not typically related to the actual value of the shares. In fact it is often lower. Any stock certificate issued for shares purchased shows the par value.
Is common stock a debit or credit?Since Accounts Payable increases on the credit side, one would expect a normal balance on the credit side.
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Normal Balance of an Account.. How do you account for par value of common stock?Example of Par Value
Let's assume that a share of common stock has a par value of $0.01 and is sold to an investor for $25. The corporation issuing the stock will debit Cash for $25.00 and will credit Common Stock for $0.01 and will credit Additional Paid-in Capital for $24.99.
When noIf no-par stock is issued, then Common Stock or Preferred Stock is CREDITED for the number of shares × stated value of each share of stock if given OR number of shares × market price per share at the time the shares were issued. 3. Paid in Capital in Excess of Par is CREDITED for the amount received above par.
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