Par value stock is a type of common or preferred stock having a nominal amount (known as par value) attached to each of its share. Par value is the per share legal capital of the company that is usually printed on the face of the stock certificate. It is also known as stated value and face value of stock.
Companies are free to choose any amount as the par value for their share but they mostly choose a very low amount for their common stock. For example, the common stock of Microsoft has a par value of $0.00000625 per share and Ford’s common stock has a par value of $0.01 per share.
Presentation of par value stock in balance sheet
A company must report the par value of its total subscribed and outstanding shares in its annual financial statements. For example, if stock’s par value is $0.50 per share and the issuing company has 100,000 shares of common stock outstanding at the end of its reporting period, then the common stock in the amount of $50,000 (= $0.50 x 100,000 shares) would be recorded as a line item of stockholders’ equity. The proper presentation of both par value common stock and par value preferred stock can be made as follows:
Par value vs market value
Par value of stock is different from its market value. In common stock trading, par value usually plays a negligible part. Companies set a par value for their stock because they are often legally required to do so. In case of common stock, it just represents a legally binding contract that the stock will not be sold below a certain price, like $0.1 per share. Once set, par value remains fixed forever unless issuing company increases or decreases its number of outstanding shares by announcing a forward or reverse stock split.
The market price per share, on the other hand, refers to the per share value or worth at which a company’s stock is actually traded in the market. Unlike par value, a stock’s market price is generally subject to frequent fluctuations. It is largely determined by investors’ perception towards the future of stock and its issuing company.
The market price of the stock of successful and well established companies are usually found to be much higher than its par value. For example, at the time of writing this article, the par value of Amazon’s stock is $0.01 per share and its market value is $3580.41 per share, which is 358,041 times higher than the par value. Similarly, the par value of Apple’s stock is $0.00001 but today it is being traded at $161.94 per share.
[Sources: https://finance.yahoo.com/lookup/; November 24, 2021 4:00PM EST]
Journal entries for the issuance of par value stock
The par value stock can be issued in three ways – at par, above par and below par. A brief explanation and journal entries for all the situations are given below:
(1) At par:
When stock is issued at a price equal to its par value, it is said to be issued at par. The journal entry is given below:
(i). When common stock is issued at par:
(ii). When preferred stock is issued at par:
(2) Above par:
When stock is issued at a price higher than its par value, it is said to have been issued above par. When stock is issued above par, the cash account is debited with the total amount of cash received, capital stock account is credited with the total par value of shares issued and an account known as “additional paid-in capital” or “capital in excess of par” is credited with the difference between cash received and the par value of shares issued. This can be summarized in the form of the following journal entry:
(i). When common stock is issued above par:
(ii). When preferred stock is issued above par:
The additional paid-in capital is a part of total paid up capital that increases the stockholders’ equity.
(3) Below par:
When stock is issued at a price lower than its par value, it is said to have been issued below par. In such an issue, the cash account is debited with the total amount of cash received, discount on issue of capital stock account is debited with the difference between amount received and the par value of shares issued and the common stock account is credited with the par value of the shares issued. The journal entry for such an issue is given below:
(i). When common stock is issued below par:
(ii). When preferred stock is issued below par:
The discount on stock reduces stockholders’ equity.
In practice, the issuance of stock at a discount (i.e., below its par value) is not usual because it is legally prohibited in many countries and stats. This legal restriction partially explains the reason of choosing a very low par value by most of the companies.
The Northern company issued 100,000 shares of its $1 par value common stock and 25,000 shares of its $100 par value preferred stock. Make journal entries to record these transactions in the books of Northern company if the shares are issued:
- at par.
- at $10 per share of common stock and $120 per share of preferred stock.
- at $0.8 per share of common stock and $80 per share of preferred stock.
(i). When common and preferred shares are issued at par:
(ii). When common and preferred shares are issued above par:
(iii). When common and preferred shares are issued below par:
Notice that in all the cases discussed above, both common and preferred stocks have been recorded with par value. When the company receives more than the par value, it records a credit in additional paid-in capital account and when, on the other hand, it receives less than the par value, it records a debit in the “discount on common/preferred stock account”.