Capital Contributed in Excess of Par Value

Definition

Capital Contributed in Excess of Par Value (Additional Paid-In Capital): Capital contributed in excess of par value refers to the amount investors pay for a company’s stock that exceeds its nominal or par value. This amount is recorded under the owner’s equity section of the balance sheet and indicates the extra funds raised by the company through stock issuance, beyond the minimal value assigned to its shares.

Examples

Example 1:
- Scenario: A company issues 1,000 shares of common stock with a par value of $1 per share, but the investors pay $10 per share.
- Calculation:
  - Par Value: 1,000 shares x $1 = $1,000
  - Total Paid: 1,000 shares x $10 = $10,000
  - Capital Contributed in Excess of Par Value: $10,000 - $1,000 = $9,000
- Balance Sheet Entry:
  - Common Stock (at Par): $1,000
  - Capital Contributed in Excess of Par: $9,000
Example 2:
- Scenario: An entrepreneur issues 500 shares with a par value of $2 each, but the market price is $15 per share.
- Calculation:
  - Par Value: 500 shares x $2 = $1,000
  - Total Paid: 500 shares x $15 = $7,500
  - Capital Contributed in Excess of Par Value: $7,500 - $1,000 = $6,500
- Balance Sheet Entry:
  - Common Stock (at Par): $1,000
  - Capital Contributed in Excess of Par: $6,500

Frequently Asked Questions (FAQs)

Q1: Why do companies issue stocks at a price higher than par value?

A1: Companies issue stocks at a higher price than par value to raise additional capital for operations, growth, and other financial needs. The differential amount above par value contributes to the company’s equity, reflecting investors’ confidence in its value and prospects.

Q2: Where is the capital contributed in excess of par value recorded?

A2: This capital is recorded in the owner’s equity section of the balance sheet, under additional paid-in capital (APIC).

Q3: Does the total paid amount by investors get divided between par value and capital in excess of par value?

A3: Yes, the total amount paid by investors is split; the par value amount is recorded under common stock, while the excess amount is placed under additional paid-in capital.

Q4: Can capital contributed in excess of par value fluctuate?

A4: This figure remains constant once recorded but can increase with additional stock issuances. It does not fluctuate with stock market prices.

Q5: What is the significance of recording such capital separately from par value?

A5: Distinguishing between par value and excess contributions provides clear and transparent financial reporting, depicting the actual funds raised above par value.

Par Value: The nominal face value of a stock or bond, specified in the corporate charter, often a minimal value set for legal purposes.

Owner’s Equity: The residual interest in the assets of an entity after deducting liabilities, including items like common stock, retained earnings, and additional paid-in capital.

Common Stock: A type of security that represents ownership in a corporation, giving shareholders voting rights and a residual claim on corporate earnings through dividends and capital appreciation.

Retained Earnings: The cumulative net income of a company that has been retained, rather than distributed to shareholders as dividends.

Online References

Suggested Books for Further Studies

“Financial Statement Analysis and Security Valuation” by Stephen H. Penman: Provides detailed insights into financial statement analysis for investment and corporate finance.
“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield: Comprehensive resource on accounting principles, including equity financing and reporting.
“Accounting for Dummies” by John A. Tracy: An accessible guidebook for understanding the fundamental concepts and applications of accounting.

Fundamentals of Capital Contributed in Excess of Par Value: Accounting Basics Quiz

### Where is capital contributed in excess of par value recorded on the balance sheet? - [x] Owner's Equity - [ ] Assets - [ ] Liabilities - [ ] Revenue > **Explanation:** Capital contributed in excess of par value is recorded under the owner's equity section of the balance sheet. ### How is the capital contributed in excess of par value calculated? - [ ] Par value multiplied by number of shares - [ ] Total paid for shares - [x] Total paid minus par value - [ ] Par value divided by number of shares > **Explanation:** This capital is calculated by subtracting the total par value of the shares issued from the total amount paid by the investors. ### What does the term 'par value' refer to in stock issuance? - [x] The nominal value of the stock - [ ] Market value of the stock - [ ] Discounted value of the stock - [ ] Future value of the stock > **Explanation:** Par value refers to the nominal or stated value of the stock specified in the corporate charter. ### What financial statement reflects capital contributed in excess of par value? - [ ] Income Statement - [x] Balance Sheet - [ ] Cash Flow Statement - [ ] Statement of Changes in Equity > **Explanation:** The Balance Sheet reflects capital contributed in excess of par value under the owner’s equity section. ### Who benefits from the excess capital paid for stocks over their par value? - [ ] Bondholders - [x] The issuing company - [ ] Financial regulators - [ ] Stock exchange > **Explanation:** The issuing company benefits as the extra funds contribute to its equity, aiding financial resources for operations and growth. ### What is another term commonly used for capital contributed in excess of par value? - [ ] Retained Earnings - [x] Additional Paid-In Capital - [ ] Deferred Revenue - [ ] Prepaid Expenses > **Explanation:** Additional Paid-In Capital is another term often used for capital contributed in excess of par value. ### Does the market price of stock affect the recorded capital in excess of par value after issuance? - [ ] Yes, it fluctuates with market price changes. - [x] No, it remains constant post-recording. - [ ] Only during quarterly financial reporting. - [ ] It depends on the issuing company's accounting policies. > **Explanation:** Once recorded, the capital contributed in excess of par value remains constant and does not fluctuate with market prices. ### Which part of stock issuance shows investor confidence in the company? - [ ] Par value - [x] Amount paid in excess of par value - [ ] Dividends paid - [ ] Number of shares issued > **Explanation:** The amount paid in excess of par value indicates investor confidence in a company's value and future prospects. ### What happens to the excess capital if a company buys back its stock? - [x] It decreases owner's equity - [ ] It increases owner's equity - [ ] It remains unaffected - [ ] It is transferred to liabilities > **Explanation:** When a company buys back its stock, the owner’s equity, including the excess capital, decreases. ### Using the following data, calculate the capital contributed in excess of par value if a company issues 2000 shares at $25 each with a par value of $5. - [x] $40,000 - [ ] $30,000 - [ ] $10,000 - [ ] $50,000 > **Explanation:** The total paid for shares is 2000 x $25 = $50,000. The par value is 2000 x $5 = $10,000. Therefore, the capital contributed in excess of par value is $50,000 - $10,000 = $40,000.

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