Issuing Par Value Stock - Online Tutor, Practice Problems & Exam Prep

When issuing par value stock, the selling price can be equal to or greater than the par value. The par value is recorded in the common stock account, while any excess is recorded as additional paid-in capital (APIC). For example, if 500,000 shares with a par value of $0.50 are sold for $2 each, cash received is $1,000,000, common stock is credited $250,000, and APIC is credited $750,000. This maintains the accounting equation: assets equal liabilities plus equity.

Issuing Par Value Stock Definitions

Alright, so let's discuss the issuance of par value stock. We're going to talk about some of the key numbers that we use and the journal entries that we make. So when we talk about issuing common stock, that just means selling common stock to the public. And remember, when we sell common stock, this isn't like making revenue, this is selling equity in the company. Right? So let's talk about some of the key terms we're going to see. First, we're going to see a selling price. Right? What do we sell the stock for to the public? Well, this can be told to you as a total amount, maybe you sold 50,000 shares for a $1,000,000, right? Or it can be told to you on a per share amount. You sold 50,000 shares for, you know, $20 each or whatever it comes out to be. Cool? So there's the selling price, then we're going to talk about this notion of the par value. So the par value is this idea of what it can be redeemed for. You don't have to get into too much thought about what the par value, what it means and everything. The key thing you want to think about without getting into the details is really that the par value is what's going to go into the common stock account. So par value, this goes into the common stock account and then everything else goes into this other account called additional paid-in capital. Alright.

Let's talk a little quickly about par value. When we talked about bonds, right? Bonds payable, the bonds had a par value usually $1,000. Well, that was the amount that the bond was redeemed for, right? We're going to see the same thing with common stock. There's going to be some par value, but, generally, the par value is very low. Okay? So the par value of a common stock is usually very low and generally, we're going to see it as less than $1. Okay? It's usually less than $1 because they don't want to have a liability for this par value if the stock isn't doing too well. But regardless, remember the par value, that's what goes into the common stock account and the rest of the money goes into this additional paid-in in capital. So this is the amount above par value that investors paid for the stock. Now, if you guys are like, I don't get this par value thing, look, don't spend too much time on it. It's not a big deal in this course, just know that you're going to be splitting up the money that you bring in by selling the stock into 2 accounts. The common stock for the par value and then additional paid-in capital, this APIC, we're going to use a pick, is usually how you call it just APIC. Additional paid-in capital is going to be where you put all that excess value. Sometimes you'll see additional paid-in capital called excess of par, something like that. Paid in capital sorry, paid in capital in excess of par. It depends on your textbook, but look how many words that is. It's so much easier to just use APIC and that's usually what you're going to see throughout your courses. So APIC is just the best way to think about it and we got that nice little acronym. Okay? So why don't we pause here and then we're going to go through 2 examples of selling stock with a par value. Alright? Let's check it out.

Issuing Par Value Stock at Par Value

Alright. So, first let's talk about when the selling price is equal to the par value. Okay. So, when we sell the stock equal to the par value, well, in that case, there's not going to be any additional paid-in capital, right? Because, remember, the par value goes to the common stock account and any extra money we bring in goes to additional paid-in capital. Well, if the selling price is the par value, then there is no additional, right? We are only going to have the par value. So let's look at this example. The Apartment Depot issued 500,000 shares of 50¢ par value common stock for $250,000. Now this is a very common way that they're going to say this to you. Notice, they're going to say 50¢ par value common stock. So that just tells you that they're selling common stock has a 50¢ par value, right? So how many shares did they sell? 500,000 shares for $250,000. Notice, in this case, they told you the total selling price of all the shares. They can easily just tell you a per-share amount instead of the total price and you should be able to convert between the two by dividing by the number of shares sold. Okay? So let's see how much each share was sold for by dividing our total selling price of 250,000 by 500,000 shares sold equals 50¢ selling price per share, right? They sold each share for 50¢ and that was because we took that total $250,000 divided by the 500,000 shares, which gives us a 50¢ per share selling price, right? And notice our par value is 50¢, our per-share selling price was 50¢, so there was no additional paid-in capital, right? So let's go ahead and do our journal entry. When there is no additional paid-in capital, it's pretty easy. What would be our debit? We sold it for $250,000 so we received cash of $250,000 so our debit is going to be cash for $250,000 and what about our credit? Remember, the par value of the stock is going to go to the common stock account and anything extra goes to additional paid-in capital. So remember common stock is an equity account and equity accounts have credit balances, right? So we're gonna have common stock as our credit here and we're gonna put the par value into this account. So the way we would always do it, regardless of whether they sell it at par value or at some amount more, we would take the number of shares sold: 500,000 times the par value of 50¢ and it would give us 250,000. So that is the amount that needs to go to the common stock account. Obviously, in this case, they got sold at par value, so there's nothing extra, but we're always gonna wanna do this calculation right here to find what goes into the common stock account, right? And then the APIC, whatever is extra is gonna be the selling price. So the total selling price minus what went into common stock, right? Everything extra would be APIC which in this case is 0, right? In this case, it's 0 because we sold it at par value. So the credit here to common stock is the 250,000 received. Okay, now we're gonna see also an example with additional paid-in capital (APIC) down below, but let's go ahead and finish this one up. So what did we have? We had assets, we received cash of 250,000, so that increased our assets by 250,000 and that came from equity, right, which we issued equity and that came in the common stock account that went up by 250,000. So our equation stays balanced here, assets equal liabilities plus equity, right? Cool. Alright. Now let's see an example with additional paid-in capital (APIC). Alright. Let's do that in the next.

Issuing Par Value Stock above Par Value

All right. Now, let's see an example where the selling price is greater than the par value. Now, you're not really going to see an example where the selling price is less than par value. I don't think I've ever seen that before. So we're going to focus on the most common case, where the selling price is greater than the par value. Well, this journal entry is going to include APIC, right? Because the par value is going to go to the common stock account, and everything extra goes into this additional paid-in capital account. Okay? So let's check it out. The Apartment Depot issued 500,000 shares of 50¢ par value common stock for $2 per share. So notice this time, they gave you a per-share selling price, and they can do it either way. They can give you the total amount that you received, or they can give you a per-share selling price. Okay? And you should be comfortable converting between the total amount received and the per-share amount. Okay? And that's really simple. You just have to divide by the number of shares, right? Divide by the number of shares or multiply by the number of shares to get to the total cash received. Okay? So remember, in this journal entry, what we're always going to see in these journal entries, we're going to receive some amount of cash, right? That's going to be a debit in our journal entry, and we sold common stock, so we're going to credit common stock. But remember, now what we do is we only put the par value into common stock and everything additional goes into a pick, right? So anytime that you're going to set up a journal entry for selling common stock, this is how you should set it up. Debit cash, credit common stock, credit APIC. Now, if you sold it at par value, well, guess what? APIC would just be 0. So we would have no APIC and it would still balance. Right? Cash and common stock would have all the value, but what you're generally going to see is an amount in APIC. Okay? So let's go ahead and figure out what our cash amount is, what our common stock amount is, and then APIC is just everything extra. Okay? So that's how you go about solving these. You want to find the total cash received, the total amount of par value that goes to the common stock account, and then everything extra is APIC. Alright? So let's start with the cash amount. So cash is going to be the number of shares we sold times the price we sold them at, right? We sold 500,000 shares and each share sold for $2. So what do we have? 500,000 shares times the $2 selling price. Well, that means we received $1,000,000, right? That should make sense. We sold 500,000 shares for 2 dollars, so we know the cash we received is going to be $1,000,000 here. So that's our debit to cash, 1,000,000. Now, what about the common stock account? It's only going to get the par value. So how much is going to go into the common stock account? Well, we sold 500,000 shares and each one has a 50 cent par-value, so we have to do 500,000 times the 50 cents par value. So common stock, that's going to equal the 500,000 shares we sold times the par value of 50 cents, which comes out to 250,000. Ooops, 250,000, that's what goes into the par, the common stock account is the par value. So here's our credit 250,000 to common stock. I kind of squished them a little bit for space. So a common stock credit 250,000. So obviously, you can tell with some simple math what the APIC is going to be, right? We just have to plug it in and that's always going to be the total cash received. So cash received minus the common stock account. Right? Whatever went into the common stock which was the par value. Right? So cash received of a million minus the 250,000 that went into Common Stock, that leaves us with 750,000 that goes into APIC, right? And that's what's going to balance out this equation, so additional paid-in capital is 750,000. Alright. So this is generally always how we're going to do it. We're only going to store the par value in the common stock account and then everything extra goes to additional paid-in capital. But notice, these are both equity accounts, right? So our equity still went up by a million. Notice our cash, right, we received cash of $1,000,000 so our assets went up by $1 million and our equity here, well, the common stock account, I'm going to put CS for common stock, that one got 250,000 and that was an increase to that account, and then APIC got 750,000 the amount above the par value and that went up as well. So the assets still equal liabilities plus equity, right? The increase in assets equals that increase in equity. Same thing. We're just splitting up that value into the common stock account and APIC account. Alright? Don't get too caught up with why we do it, just do it this way for now. Okay? In higher-level courses, you'll start dealing with issues with APIC and things like that, but you don't need to get into it now. It's a very simple calculation when you just do it because you need to do it, alright? So our cash went up by a million, our equity went up by a million as well. Cool. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is par value stock and how is it recorded in financial statements?

Par value stock is a type of stock that has a nominal value assigned to it, known as the par value. This value is typically very low, often less than $1. When par value stock is issued, the par value is recorded in the common stock account. Any amount received from the sale of the stock above the par value is recorded in an account called Additional Paid-In Capital (APIC). For example, if 500,000 shares with a par value of $0.50 are sold for $2 each, the common stock account is credited $250,000 (500,000 shares × $0.50), and APIC is credited $750,000 (total cash received of $1,000,000 minus the $250,000 par value).

How do you calculate Additional Paid-In Capital (APIC) when issuing par value stock?

To calculate Additional Paid-In Capital (APIC) when issuing par value stock, follow these steps: First, determine the total cash received from the sale of the stock by multiplying the number of shares sold by the selling price per share. Next, calculate the total par value by multiplying the number of shares sold by the par value per share. Finally, subtract the total par value from the total cash received to find the APIC. For example, if 500,000 shares with a par value of $0.50 are sold for $2 each, the total cash received is $1,000,000 (500,000 shares × $2). The total par value is $250,000 (500,000 shares × $0.50). Therefore, APIC is $750,000 ($1,000,000 - $250,000).

What journal entries are made when issuing par value stock at a price greater than the par value?

When issuing par value stock at a price greater than the par value, the following journal entries are made: Debit the cash account for the total amount received from the sale. Credit the common stock account for the total par value (number of shares sold × par value per share). Credit the Additional Paid-In Capital (APIC) account for the excess amount received over the par value. For example, if 500,000 shares with a par value of $0.50 are sold for $2 each, the journal entry would be: Debit Cash $1,000,000, Credit Common Stock $250,000, and Credit APIC $750,000.

What happens if the selling price of par value stock is equal to the par value?

If the selling price of par value stock is equal to the par value, there is no Additional Paid-In Capital (APIC) recorded. The entire amount received from the sale is recorded in the common stock account. For example, if 500,000 shares with a par value of $0.50 are sold for $0.50 each, the total cash received is $250,000 (500,000 shares × $0.50). The journal entry would be: Debit Cash $250,000 and Credit Common Stock $250,000. In this case, APIC is zero because the selling price equals the par value.

Why is the par value of common stock usually set very low?

The par value of common stock is usually set very low, often less than $1, to minimize the company's liability. If the stock's market value falls below the par value, the company could be liable to redeem the stock at its par value. By setting a low par value, companies reduce the risk of having to pay out large sums if the stock's market value declines. Additionally, a low par value simplifies accounting and reduces the potential for legal issues related to stock issuance.