Par Value Stock
The term par value stock refers to the accounting value assigned to a share of common stock, and is also referred to as its stated value or face value. The par value of common stock has no relationship to the market value of the security.
Capital stocks issued by companies today typically have very low par value, or no par value.
At the turn of the 20th Century, nearly all capital stock was issued with a par value of $100. In today’s marketplace, common stock with a par value above $1.00 would be rare, and most companies issue these securities with no par value. Companies moved away from issuing common stock with high par values to avoid the need to account for a contingent liability if the market’s perceived value of the stock were to fall below its par value.
Today, companies will typically issue common stock with no par value. If a jurisdiction requires the company to issue stock with a par value, the company will usually select the smallest currency value in that geography. For example, a company might issue common stock with a par value of $0.01 in the United States.
The par value of common stock remains an important consideration when preparing the company’s financial statements. When a company issues common stock with a par value, the following accounts will appear in their financial statements:
- Common Stock: reflects the value of the common stock issued by the company with a par value.
- Paid-in Capital in Excess of Par: reflects the excess of par paid by purchasers of common stock when issued.
Company A issued 1,000,000 shares of common stock with a par value of $0.01. During this initial public offering, Company A was able to raise $20,000,000. The journal entries to record the issuance of this common stock would be:
|Common Stock: 1,000,000 shares, par value $0.01||$10,000|
|Paid-in Capital in Excess of Par||$19,990,000|