Premium on Capital Stock

Definition

In the United States, the term “premium on capital stock” pertains to any amount received from stockholders that exceeds the par value of the stock issued by a corporation. This premium is credited to a specific account known as “Additional Paid-in Capital” (APIC) or “Premium on Capital Stock.”

Key Points:

Not considered revenue; it is part of equity.
Reflects the excess over par value that investors pay for the stock.
Reported in the equity section of the balance sheet.

Examples

Example 1: A company issues 1,000 shares with a par value of $1 per share for $10 per share. The par value totals $1,000 (1,000 shares x $1), and the premium (APIC) is $9,000 [(1,000 shares x ($10 - $1)].
Example 2: XYZ Corp issues 500 shares of $5 par value stock at $15 per share. Here, the premium on capital stock is $5,000 [(500 shares x ($15 - $5)].

FAQs

1. Is Premium on Capital Stock considered income?

No, it is part of stockholders’ equity and not regarded as revenue.

2. How is Premium on Capital Stock recorded in the balance sheet?

It is listed under the paid-in-capital section of stockholders’ equity.

3. What happens to Premium on Capital Stock upon the sale of stock?

It remains within the equity section of the balance sheet and does not affect net income.

4. Can Premium on Capital Stock be used to pay dividends?

Generally, it is not used for paying dividends; dividends are typically paid from retained earnings.

5. What is the difference between par value and premium?

Par value is the nominal or face value of the stock; the premium is the excess amount received over this par value.

Equity

Equity represents the ownership interest held by shareholders in a company, encompassing both common and preferred stock, retained earnings, and additional paid-in capital.

Par Value

Par value is the nominal value assigned to a share of stock in the corporate charter, often minimal and not indicative of market value.

Paid-in Capital

Paid-in capital is the total amount of capital “paid in” by investors during common or preferred stock issuance, including par value and additional paid-in capital.

Balance Sheet

The balance sheet is a financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a particular point in time.

Online References

Suggested Books for Further Studies

“Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
“Financial Accounting” by Robert Libby, Patricia Libby, and Frank Hodge
“Accounting Principles” by Jerry Weygandt, Paul Kimmel, and Donald Kieso

Accounting Basics: “Premium on Capital Stock” Fundamentals Quiz

### What does "premium on capital stock" represent? - [ ] Income for the company - [x] Excess amount over par value received from stockholders - [ ] Loan from stockholders - [ ] Discount on stock > **Explanation:** Premium on capital stock represents the excess amount received from stockholders over the par value of the stock issued. ### Where is the premium on capital stock recorded? - [ ] Assets section of the balance sheet - [ ] Liabilities section of the balance sheet - [x] Equity section of the balance sheet - [ ] Income statement > **Explanation:** The premium on capital stock is recorded under the paid-in-capital section within stockholders' equity. ### Is premium on capital stock considered revenue? - [ ] Yes, it adds to the company’s revenue - [x] No, it is part of equity - [ ] Sometimes, depending on the context - [ ] Only when stocks are sold within the fiscal year > **Explanation:** The premium on capital stock is part of equity and is not considered revenue or income. ### What other term is commonly used for premium on capital stock? - [ ] Corporate debt - [x] Additional Paid-In Capital (APIC) - [ ] Retained earnings - [ ] Operating expenses > **Explanation:** Premium on capital stock is also known as Additional Paid-In Capital (APIC). ### Can the premium on capital stock be used to pay dividends? - [ ] Yes, always - [ ] No, never - [ ] Yes, but only after shareholder approval - [x] Generally, dividends are paid from retained earnings, not premium on capital stock > **Explanation:** Dividends are typically paid from retained earnings, not from the premium on capital stock. ### What can lead to a premium on capital stock? - [ ] Issuing stock at par value - [x] Issuing stock above par value - [ ] Issuing bonds - [ ] Declaring dividends > **Explanation:** A premium on capital stock occurs when stock is issued above its par value. ### What is par value of a stock? - [ ] Market price of the stock - [ ] Dividends issued per share - [x] Nominal or face value set in the corporate charter - [ ] Company’s total assets divided by its number of shares > **Explanation:** Par value is the nominal or face value of a share as assigned in the corporate charter. ### How is additional paid-in capital calculated? - [x] By subtracting par value from the issuance price and multiplying by the number of shares issued - [ ] By adding par value and issuance price together - [ ] By dividing company’s equity by the number of shares - [ ] By multiplying par value by the number of shares sold > **Explanation:** Additional Paid-In Capital is calculated by taking the issuance price minus par value and then multiplying by the number of shares issued. ### Which account reflects the total amounts paid by investors over par value? - [ ] Accumulated depreciation - [ ] Retained earnings - [x] Additional Paid-In Capital - [ ] Goodwill > **Explanation:** The Additional Paid-In Capital account reflects the total amounts paid by investors over the par value. ### What type of account is the premium on capital stock? - [ ] Liability - [x] Equity - [ ] Revenue - [ ] Expense > **Explanation:** The premium on capital stock is an equity account reflecting amounts received above par value.

Thank you for exploring the concept of “Premium on Capital Stock.” This comprehensive guide aims to solidify your understanding and assist you in practical applications within corporate finance.