Issuing No Par Value Stock - Online Tutor, Practice Problems & Exam Prep

When issuing common stock with no par value, all proceeds are recorded in the common stock account without splitting into additional paid-in capital (APIC). For example, if 500,000 shares are issued for $250,000, the entire amount is credited to common stock. This simplifies the accounting process, as there is no par value to consider. Understanding this concept is crucial for accurately reflecting equity transactions in financial statements, ensuring compliance with accounting standards.

Issuing No Par Value Stock

Alright, now let's talk about the special case where we're going to issue common stock that has no par value. Sometimes, we will see that there is common stock and they do not specify any par value amount. It is possible that companies will sell stock that has no par value, okay? In those cases, the journal entry actually gets easier. We are not going to use the additional paid-in capital account, so we are still going to have a lot of the same terminology here. We are still selling, issuing shares of this common stock and we are going to have the selling price, right, just like before and this was the cash that we are going to receive. We are going to receive some amount of cash when we issue these shares and sell them to the public and then before we were dealing with this par value, remember, it said something like we issued 50,000 shares of 50¢ par value common stock. Well, in this case, it is not going to say that 50¢ par value, it will just say we issued 50,000 shares of common stock for this price. Whatever it might be. So, we are not going to have this par value and remember when we talked about par value, it was that these common stocks usually had some kind of low par value usually under $1 and this used to make more sense back in the day, but in recent years, par value does not take as much of a big deal here when we deal with common stock. So, what we are going to see is we are not going to deal with the additional paid-in capital account when we have no par value, everything is just going to go into the common stock account. So everything that we sell in cash goes into the common stock account, and we do not deal with additional paid-in capital. Remember, the additional paid-in capital was the amount above the par value. Well, since we do not have a par value, well, everything is just going to go into the common stock account and we are not going to split it up between these two accounts. Okay? So additional paid-in capital, that is what we are calling a pick. We will write it in here so you do not forget and let's just dive right into the example here. So notice in this first one, when common stock has no par, all of the proceeds will be included in the common stock account. Okay? This is kind of how we were doing this before when we were first doing equity entries, before we actually studied stockholders' equity. Well, this is exactly what it looked like. Everything was just going into common stock and we were not dealing with an additional paid-in capital account. So let's check it out. The Apartment Depot issued 500,000 shares of no par common stock for $250,000. Well, since we do not have a par account and we are not going to put some in common stock, some in APIC, this becomes really easy. Well, we received cash of $250,000. Let me give some space there. And all of that goes into the common stock account. Okay? This is a special case when we have no par value that everything just goes into the common stock account. Okay? Remember, everything above the par value would go into an APIC account if we had a par value. So we do not see that here. Now, notice there are two ways they can give you this information. They could tell you the total selling price, right? The total cash received or they could just tell you a per share amount like they do in the next problem. Right? So check this one out. Well, actually, let me finish this up here. Just like before, right? We received cash of 250,000 so that increased our assets and our equity from selling common stock went up 250,000 just like we were used to. Very simple balancing of the equation. So let's check out the second example here where it is very similar. The Apartment Depot issued 500,000 shares of no par value common stock and notice they do not even have to say no par value, they could just say 500 shares of common stock and you have to assume there is no par value. If they do not tell you what it is, there is no way for you to know, so you would treat it like this. 500,000 shares for $2 per share. If they do not give you a par value, well, everything goes to the common stock account. So what is everything? Notice, in this case, they gave us a per-share amount, right? So we need to find the total amount that we raised. So how much cash did we actually receive? What was the 500,000 shares times $2 per share? That means there was $1,000,000 that we received in cash for issuing these shares, so that is going to be the cash in this entry and that would be the million. That is our debit, and our credit is still just common stock, right? Since there is no par value, we do not split it up between common stock and APIC. It is as easy as that. Right? So a lot of times, teachers might just keep it simple, and just do it like this. And you do not have to deal with the APIC account. Okay? So this is how you would do these entries if you were not given a par value, alright? And that is about it for this. Overall, it is a very simple concept. Why do not we go ahead and move on to the next video?

Here’s what students ask on this topic:

What is no par value stock?

No par value stock is common stock that does not have a par value specified in the corporate charter. This means that the stock is not assigned a minimum value per share. When issuing no par value stock, all proceeds from the sale are recorded in the common stock account, simplifying the accounting process by eliminating the need to split amounts between common stock and additional paid-in capital (APIC).

How do you record the issuance of no par value stock in a journal entry?

To record the issuance of no par value stock, you debit the cash account for the total amount received and credit the common stock account for the same amount. For example, if a company issues 500,000 shares of no par value stock for $250,000, the journal entry would be:

$•\text{Debit Cash: \$250,000}$

$•\text{Credit Common Stock: \$250,000}$

What is the difference between par value stock and no par value stock?

Par value stock has a minimum value per share specified in the corporate charter, often a nominal amount like $0.01 or $1.00. When issuing par value stock, the proceeds are split between the common stock account (at par value) and additional paid-in capital (APIC) for any amount above par value. No par value stock does not have a specified minimum value, and all proceeds from its issuance are recorded in the common stock account, simplifying the accounting process.

Why do companies issue no par value stock?

Companies issue no par value stock to simplify their accounting and avoid legal complications associated with par value. Par value was historically used to protect creditors by ensuring a minimum price for shares, but it has become less relevant over time. Issuing no par value stock eliminates the need to split proceeds between common stock and additional paid-in capital (APIC), making the accounting process more straightforward.

How does issuing no par value stock affect the balance sheet?

When a company issues no par value stock, the entire proceeds from the sale are recorded in the common stock account on the balance sheet. This increases both the cash (asset) and common stock (equity) accounts by the same amount, maintaining the balance sheet equation. For example, if a company issues 500,000 shares for $1,000,000, both the cash and common stock accounts will increase by $1,000,000.