What is No Par Value Capital Stock?
No par value capital stock is a type of stock issued without an assigned face value printed on the stock certificate. This means that the shares do not have a pre-determined nominal value or par value. This concept is applicable primarily in the USA and Canada, as it is not allowed under UK law.
Key Features:
- Simplified Accounting: The absence of par value avoids the need to account for stock at a declared face value, reducing administrative complexity.
- No Premium Account Needed: On issuance, the proceeds from the sale of no par value stock are directly credited to the capital stock account.
- Avoids Contingent Liability: Shareholders are not subject to contingent liability associated with stock discounts, mitigating risk for stockholders.
Examples of No Par Value Capital Stock
- Technology Startups: Many tech startups issue no par value stock to avoid complicated valuations associated with initial company value.
- Mergers and Acquisitions: During an acquisition, a company may issue no par value stock to simplify the integration of stock from the acquired company.
- Small and Medium Enterprises (SMEs): SMEs often opt for no par value stock to streamline operations and remove the necessity for maintaining par value records.
Frequently Asked Questions (FAQs)
What are the accounting entries for no par value stock issuance?
Answer: When issuing no par value capital stock, cash is debited, and the total proceeds received are credited to a capital stock account.
Why would a company choose no par value stock?
Answer: Companies opt for no par value stock to avoid the administrative and accounting complexities associated with assigning and maintaining a par value, as well as to protect shareholders from contingent liabilities.
Is no par value stock legal in all countries?
Answer: No, while it is legal in the USA and Canada, it is not allowed under UK law.
Can no par value stock have any value assigned?
Answer: No, by definition, no par value stock does not have a value assigned at issuance. The value is determined by the market.
How does no par value stock affect shareholders?
Answer: Shareholders benefit as they are not liable for the difference between the par value and the market value, avoiding contingent liabilities.
Related Terms with Definitions
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Par Value Stock: Shares that have a face value or nominal value printed on the stock certificate, and this value represents the minimum price at which shares can be issued.
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Contingent Liability: A potential obligation that may occur depending on the outcome of a future event; for par value stockholders, this exists if shares are issued below the par value.
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Premium on Capital Stock: In cases where shares are sold above par value, the excess amount over the par value is credited to a premium account.
Online References
- Investopedia: No Par Value Stock
- AccountingTools: No Par Value Stock
- SEC.gov: Small Business and the Sec
Suggested Books for Further Studies
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- Accounting Made Simple: Accounting Explained in 100 Pages or Less by Mike Piper
- Financial Accounting by Walter T. Harrison Jr, Charles T. Horngren, C. William Thomas
Accounting Basics: “No Par Value Capital Stock” Fundamentals Quiz
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