Issuing Par Value Stock: Videos & Practice Problems

When a company issues common stock, it is essentially selling equity to the public rather than generating revenue. This process involves understanding key financial terms, particularly the selling price and par value. The selling price refers to the total amount received from the sale of shares, which can be expressed as a total (e.g., $1,000,000 for 50,000 shares) or on a per-share basis (e.g., $20 per share).

The par value is a nominal value assigned to the stock, which is often set very low, typically less than $1. This value is significant because it determines the amount that will be recorded in the common stock account. Any amount received above this par value is recorded in a separate account known as Additional Paid-In Capital (APIC). APIC represents the excess amount that investors are willing to pay over the par value of the stock.

For example, if a company sells shares with a par value of $0.01 for $20 each, the journal entries would reflect $0.01 per share in the common stock account and the remaining amount in APIC. This division is crucial for accurate financial reporting and understanding the equity structure of the company.

In summary, when issuing common stock, the total proceeds are split between the common stock account (reflecting par value) and the APIC account (reflecting the excess over par value). This distinction is essential for both accounting practices and financial analysis.

When a company sells stock at its par value, there is no additional paid-in capital (APIC) generated. The par value of the stock is the minimum price at which shares can be sold, and any amount received above this value would typically be recorded as APIC. For instance, consider a scenario where a company, such as Apartment Depot, issues 500,000 shares of common stock with a par value of $0.50 for a total of $250,000. In this case, the selling price per share can be calculated by dividing the total selling price by the number of shares sold:

\[ \text{Selling Price per Share} = \frac{\text{Total Selling Price}}{\text{Number of Shares Sold}} = \frac{250,000}{500,000} = 0.50 \text{ USD} \]

Since the selling price per share equals the par value, there is no excess amount to record as APIC. The journal entry for this transaction would involve debiting the cash account for the total amount received and crediting the common stock account for the total par value of the shares issued. The calculations for the common stock account would be as follows:

\[ \text{Common Stock Credit} = \text{Number of Shares Sold} \times \text{Par Value} = 500,000 \times 0.50 = 250,000 \text{ USD} \]

Thus, the journal entry would be:

Debit: Cash $250,000

Credit: Common Stock $250,000

This entry reflects an increase in assets (cash) and an increase in equity (common stock), maintaining the accounting equation: Assets = Liabilities + Equity.

In contrast, when stock is sold above par value, the excess amount is recorded as APIC. This situation will be explored further in subsequent examples, highlighting how to calculate and record APIC alongside common stock transactions.

When a company issues common stock at a selling price greater than its par value, it records the transaction in a specific way that reflects both the cash received and the par value of the stock. In this scenario, the company also accounts for any excess amount received over the par value in an account known as Additional Paid-In Capital (APIC).

For example, consider a company that issues 500,000 shares of common stock with a par value of $0.50 per share at a selling price of $2.00 per share. To determine the total cash received, you multiply the number of shares sold by the selling price per share:

Cash = Number of Shares × Selling Price

Cash = 500,000 shares × $2.00 = $1,000,000

This cash amount is recorded as a debit in the journal entry. Next, the common stock account is credited with the total par value of the shares issued, calculated as follows:

Common Stock = Number of Shares × Par Value

Common Stock = 500,000 shares × $0.50 = $250,000

The remaining amount, which is the difference between the total cash received and the par value recorded in the common stock account, is credited to the APIC account:

APIC = Cash Received - Common Stock

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