When shares without par value are sold the excess over the stated value shall be credited to?

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Reasons for Issuing No-Par-Value Stocks

Companies issue and investors accept no-par value stocks because of the following reasons:

1. The no-par-value stocks provide the companies with the choice to set higher stock prices for public offering in the future.
2. The par value of the stock is not related to the actual value of the stock in the exchange market.
3. The companies are liable to the shareholders in case the trading price of the stock drops below the stock’s par value. By issuing no-par-value stocks, the company decreases its liability.
4. The price of the no-par-value stock goes through natural variations.
5. No-par-value stocks can be traded in hundreds or thousands of dollars.
6. The value of the no-par-value stock is the price that can be readily paid by the investors. It is determined by measuring the financial health of the company, competitiveness, and changes in the industry.
7. Issuing a no-par-value stock prevents the stocks from being misquoted in value. The stocks’ value fluctuates according to market conditions.
8. Since the stock price fluctuates with the market and differs remarkably from the par value, no-par-value stocks are more attractive to stock issuers.

Accounting Entry of Par Value and No-Par-Value Stocks

State 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.

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A share of stock in a company may have a par value or no-par value. These categories are both pretty much a historical oddity and have no relevance to the stock's price in the market.

The par value, or face value, is the stated value per share. This price was printed on paper stock certificates before they became antiquated for newer electronic versions. If a company did not set a par value, its certificates were issued as no-par value stocks.

Notably, par value for a bond is different, referring to its face value, or full value at maturity.

• A par value for a stock is its per-share value assigned by the company that issues it and is often set at a very low amount such as one cent.
• A no-par stock is issued without any designated minimum value.
• Neither form has any relevance for the stock's actual value in the markets.
• If a company issues no-par stock, they will not have a potential future debt obligation to shareholders should the market price drop below the supposed par value.
• The accounting treatment for the sale of par value stock and no-par value stock is fairly similar, though the transactions use different general ledger accounts.

Companies sell stock as a means of generating equity capital. Therefore, the par value multiplied by the total number of shares issued is the minimum amount of capital that will be generated if the company sells all the shares. The par value was printed on the front of the old version, paper stock certificate and is often available in digital form today.

In reality, since companies were required by state law to set a par value on their stock, they choose the smallest possible value, often one cent. This penny price is because the par value of a share of stock constitutes a binding two-way contract between the company and the shareholder.

If shareholders pay less than the par value for a share of stock and the issuing company later becomes unable to meet its financial obligations, its creditors can sue shareholders for the difference between the purchase price and the par value to recoup the unpaid debt. If the market price of the stock falls below the par value, the company may be liable to shareholders for the difference. Most companies opt to set a minimum par value for their stock shares to circumvent either of these scenarios.

For example, if company XYZ issues 1,000 shares of stock with a par value of $50, then the minimum amount of equity that should be generated by the sale of those shares is $50,000. Since the market value of the stock has virtually nothing to do with par value, investors may buy the stock on the open market for considerably less than $50. If all 1,000 shares are purchased below par, say for $30, the company will generate only $30,000 in equity. If the business goes under and cannot meet its financial obligations, shareholders could be held liable for the $20-per-share difference between par and the purchase price.

Unlike a stock, a bond has a real par value. The bond is worth its par value at maturity.

In some states, companies are required by law to set a par value for their stocks. If not, they may choose to issue "no-par" stock shares.

This "no-par" status means that the company has not assigned a minimum value to its stock. No-par value stocks do not carry the theoretical liabilities of par value issues since there is no baseline value per share. However, since companies assign minimal par values if they must, there's little effective difference between a par stock and a no-par stock.

There are several reasons why a company would elect to issue no-par stock:

1. The company has less flexibility in pricing for future public offerings should the company set the par value of its stock too high.
2. The company wants to avoid potential liabilities to shareholders should the market value of its stock drops below its par value.
3. The company wants to avoid potentially misquoted valuations. The stock's value or market price will often widely vary from par value.
4. The company wants a less complicated accounting structure for reporting as no-par stock issuances only require use of one general ledger account.

In most cases, the par value of the stock today is little more than an accounting concern, and a relatively minor one at that.

The only financial effect of a no-par value issuance is that any equity funding generated by the sale of no-par value stock is credited to the common stock account. Conversely, funds from the sale of par value stock are divided between the common stock account and the paid-in capital account.

The par value of a stock may have become a historical oddity, but the same is not true for bonds. Bonds are fixed-income securities issued by corporations and government bodies to raise capital. A bond with a par value of $1,000 really can be redeemed for $1,000 at maturity.

Imagine a company issues 100,000 shares of stock at $15/share. The company has decided to issue no-par stock. As part of the sale, the company received $1.5 million (100,000 shares * $15/share). The accounting entry for the sale results in a debit to cash received. The company's equity section of their balance sheet also increases. Since no-par value stock was issued, only the common stock account is used.

• Debit: Cash, $1,500,000
• Credit: Common Stock $1,500,000

Now, let's say the company decided to instead issue the same 100,000 shares with a par value of $1/share. As par value and no-par value often have no bearing on market prices, the company still received $15/share. The accounting entry results in the same debit to cash, but the company must now record two credits: one for the par value of the stock, and one for the excess proceeds greater than par value. The account used for the proceeds greater than par value is called "Additional Paid-In-Capital".

The common stock account is credited for the amount of par value received. In this example, the company received proceeds of $100,000 (100,000 shares issued at $1/share par value). The company also credits the Additional Paid-In-Capital account for the proceeds received in excess of par value. In this example, the proceeds equal $1,400,000 (100,000 shares * ($15 market value - $1 par value).

• Debit: Cash $1,500,000
• Credit: Common Stock $100,000
• Credit: Additional Paid-In Capital $1,400,000

If a stock has no-par value, a company has not assigned a minimum value for its stock (often at the time of issuance). In some states, the company may not legally be required to assign this value. The company must indicate the share’s no-par value on the stock certificate or within its articles of incorporation. This value does not impact the market value of a stock.

A company may issue no-par stock to avoid the circumstance that its share price drops below par value and it is owed a liability to shareholders. Imagine a situation where a stock has a par value of $1 and a market value of $0.75. Because the market value is trading below par value, the company has a liability owed to shareholders of $0.25.

By issuing no-par stock, the company relinquishes any determination of value for the stock. Therefore, the company will not have a future obligation to shareholders should its stock price decline.

Shares can be issued below par value, though doing so would be unfavorable for the issuing company. The company would have a per-share liability to shareholders for the difference between the par value of the stock and the issuance price.

Par value often has little to no bearing to shareholders. One of the only circumstances shareholders may be impacted by par value is if the issuing company goes bankrupt and the shareholder acquired the shares of stock for below par value. In this rare circumstance, debtors can legally pursue these shareholders for the difference between what they paid for the shares and the par value.