What is par value of a stock?

2. Accounting for par value of stock

Weíll continue our Corporation X example by looking at some accounting entries involving par value. First off is the entry for the initial stock issuance. Letís assume that Corporation X sold all 100,000 shares for $5.00 per share.

Account Titles

Debit

Credit

 

Cash

$500,000

 

(total proceeds)

     Common Stock††††††††††

 

$100,000

(100,000 x par value)

     Capital Surplus

 

$400,000

(additional sale price above par)

Here, the cash account is debited for the entire issuance price. The corresponding credit is split up between the Common Stock account -- alternatively called Stated Capital on the balance sheet -- and an account called Capital Surplus or Additional Paid-in Capital.

Accounting entries for no-par stock with a stated value are the same as for stock with a par value. Additional proceeds received above stated value are listed in a separate equity account. On the other hand, no such separation occurs for stock issued with no par value and no stated value. Letís assume now that Corporation X issues 100,000 shares of no par stock for $5.00 per share.

Account Titles

Debit

Credit

Cash

$500,000

 

     Common Stock††††††††††

 

$500,000

Here, Corporation X simply records the entire sale in the common stock account.

When issuing stock, a corporation usually incurs various costs (e.g., legal fees, printing fees) related to the transaction. The required treatment for these costs under current U.S. GAAP is to directly reduce the amounts entered for the transaction. For example, if Corporation X paid a $1,000 underwriting fee for the above par value transaction, the cash debit and the capital surplus credit would both be reduced by $1,000.

3. Stock splits and reverse stock splits

A corporation can alter the par value of its stock through either a stock split or a reverse stock split. For example, if Corporation X declared a 2-for-1 stock split, the number of outstanding shares would double to 200,000, and each share would have a par value of $0.50. A 1-for-2 reverse split would have the opposite effect. This can be a particularly difficult process -- just imagine how difficult it is to change your phone number. Every document with the wrong par value referenced must be changed to account for the split. For more information about stock splits and stock dividends, refer to the article What is a stock split?

Not a member?
See why people join our
online accounting course:
Lecture Contents:
Free Study Notes
Download free accounting study notes by signing up for our free newsletter (example):
First Name:
E-mail:
We never share or sell your e-mail to third parties.
Ask a Question
Suggest a Topic
Do you have an interesting question or topic?
Suggest it to be answered on Simplestudies.com: