Definition: Paid in Capital is the amount of cash or other assets that owners put into a company for stock. Notice that paid in capital can exist with either a contribution of cash or assets. This is particularly important for new and start up corporations. A lot of time new companies don’t need cash as much as they need equipment. Investors can contribute equipment and receive stock in exchange. Whenever investors or current shareholders contribute money to a corporation, paid in capital is created, but what is paid in capital in excess of par? What Does Paid-In Capital in Excess of Par Mean?Paid in capital in excess of par is essentially the difference between the fair market value paid for the stock and the stock’s par value. In other words, it’s the premium paid for an appreciated stock. Paid in capital in excess of par is created when investors pay more for their shares of stock than the par value. ExampleFor instance, Joe decides to buy 100 shares of Orange Guitars, Inc. for $1,000. Orange Guitars, Inc. par value is only $1 per share. This means that Joe paid $9 per share more than the par value of the stock. This payment in excess of the par value is recorded in its own equity account called paid in capital in excess of par. So Orange Guitars, Inc. would debit cash for the $1,000 and credit common stock for the $1 par value of $100 and credit paid in capital in excess of par for $900. Here is what the journal entry to record the stock issuance would look like. Download this accounting example in excel.
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Capital in excess of par is the amount paid by investors to a company for its stock, in excess of the par value of the stock. Par value is the legal capital per share, and is usually printed on the face of the stock certificate. Since par value is usually a very small amount per share, such as $0.01, most of the amount paid by investors is usually classified as capital in excess of par. Some states allow for the issuance of stock that has no par value at all. In these cases, the capital in excess of par is the entire amount paid by investors to a company for its stock. When stock trades among investors (such as on a stock exchange) there is no payment to the issuing entity, so there is no change in the amount of capital already recorded by the issuer. The amount of capital in excess of par is recorded in the additional paid-in capital account, and has a credit balance. For example, if ABC Company sell 100,000 shares of its common stock for $5 per share, and the par value of each share is $0.01, then the amount of the capital in excess of par is $499,000 (100,000 shares x $4.99/share), and is recorded as follows:
Capital in excess of par is also known as the premium on common stock. August 04, 2022/
Each share of common or preferred capital stock either has a par value or lacks one. The corporation’s charter determines the par value printed on the stock certificates issued. Par value may be any amount—1 cent, 10 cents, 16 cents, $ 1, $5, or $100. Low par values of $10 or less are common in our economy. Par value gives no clue as to the stock’s market value. Shares with a par value of $5 have traded (sold) in the market for more than $600, and many $100 par value preferred stocks have traded for considerably less than par. Par value is not even a reliable indicator of the price at which shares can be issued. New corporations can issue shares at prices well in excess of par value or for less than par value if state laws permit. Par value gives the accountant a constant amount at which to record capital stock issuances in the capital stock accounts. As stated earlier, the total par value of all issued shares is generally the legal capital of the corporation. To record the issue of common (or preferred) stock, you will:
Keep in mind your journal entry must always balance (total debits must equal total credits). What happens if we don’t have a par value? Watch this video to demonstrate par and no-par value transactions. Notice how the accounting is the same for common and preferred stock. After the video, we will look at some more examples. To illustrate the issuance of stock for cash, assume a company issues 10,000 shares of $20 par value common stock at $22 per share. The following entry records the issuance:
Notice that the credit to the Common Stock account is the par value times the number of shares issued. The accountant credits the excess over par value ($20,000) to Paid-In Capital in Excess of Par Value; it is part of the paid-in capital contributed by the stockholders. Thus, paid-in capital in excess of par (or stated) value represents capital contributed to a corporation in addition to that assigned to the shares issued and recorded in capital stock accounts. The paid-in capital section of the balance sheet appears as follows:
When it issues no-par stock with a stated value, a company carries the shares in the capital stock account at the stated value. Any amounts received in excess of the stated value per share represent a part of the paid-in capital of the corporation and the company credits them to Paid-In Capital in Excess of Stated Value. The legal capital of a corporation issuing no-par shares with a stated value is usually equal to the total stated value of the shares issued. To illustrate, assume that the DeWitt Corporation, which is authorized to issue 10,000 shares of common stock without par value, assigns a stated value of $20 per share to its stock. DeWitt issues the 10,000 shares for cash at $ 23 per share. The entry to record this transaction is:
DeWitt carries the $ 30,000 received over and above the stated value of $200,000 permanently as paid-in capital because it is a part of the capital originally contributed by the stockholders. However, the legal capital of the DeWitt Corporation is $200,000. A corporation that issues no-par stock without a stated value credits the entire amount received to the capital stock account. For instance, consider the DeWitt Corporation’s issuance 10,000 shares of no-par stock for $250,000. If no stated value had been assigned, the entry would have been as follows:
Since the company may issue shares at different times and at differing amounts, its credits to the capital stock account are not uniform amounts per share. This contrasts with issuing par value shares or shares with a stated value. The actual capital contributed by stockholders is $250,000. In some states, the entire amount received for shares without par or stated value is the amount of legal capital. The legal capital in this example would then be equal to $ 250,000. As you saw in the video, stock can be issued for cash or for other assets. When issuing capital stock for property or services, companies must determine the dollar amount of the exchange. Accountants generally record the transaction at the fair value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident. To illustrate, assume that the owners of a tract of land deeded it to a corporation in exchange for 1,000 shares of $12 par value common stock. The land had a market value of $14,000. The required entry is:
As another example, assume a firm issues 100 shares of preferred stock with a par value of $40 per share in exchange for legal services received in organizing as a corporation. The attorney previously agreed to a price of $5,000 for these legal services but decided to accept stock in lieu of cash. In this example, the correct entry is:
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