Definition
Capital paid in excess of par value, also known as Additional Paid-In Capital (APIC), is the amount shareholders pay for the shares that is above the nominal or par value of the stock. This value is recorded in the equity section of a company’s balance sheet and represents funds that are available beyond the basic value of common stock. It is an indication of investor confidence and can be used by the company for various purposes such as expansion, debt reduction, or other capital-intensive activities.
Examples
-
Initial Public Offering (IPO): A company issues shares with a par value of $1 each, but they are sold to investors for $15 each. The additional $14 per share is considered capital paid in excess of par value.
-
Secondary Offering: A company with outstanding shares having a par value of $5 each issues additional shares at $25 per share. Here, the $20 over the par value per share would be recorded as capital paid in excess of par value.
Frequently Asked Questions (FAQs)
What is the par value of a stock?
Par value is the nominal or face value of a stock as stated in the corporate charter. It is often set at a minimal amount, such as $0.01 or $1 per share, and does not necessarily reflect the stock’s market value.
Why is capital paid in excess of par value important?
This figure is important because it indicates the premium investors are willing to pay over the par value, reflecting their confidence in the company’s future prospects. It also provides added financial flexibility for the company.
Can capital paid in excess of par value be used for any purpose by the company?
Yes, funds recorded as capital paid in excess of par value can generally be used for any corporate purpose, including expansion, research and development, debt repayments, or other operational needs.
Is capital paid in excess of par value taxable?
While capital contributions themselves are not typically taxable to the corporation, any use of these funds generating income would be subject to standard corporate taxes.
-
Par Value: Nominal value of a bond, share of stock, or a coupon as stated by the issuer. For most stocks, par value is a statutory minimum placed on shares.
-
Additional Paid-In Capital (APIC): Similar to capital paid in excess of par value, it is the amount paid by investors over and above the par value of the shares.
-
Common Stock: Equity ownership in a corporation, typically providing voting rights and a share of dividends.
-
Initial Public Offering (IPO): The first sale of stock by a company to the public, often to raise new equity capital.
Online References
Suggested Books for Further Studies
- “Corporate Finance: The Core” by Jonathan Berk and Peter DeMarzo
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, and C. William Thomas
Fundamentals of Capital Paid in Excess of Par Value: Corporate Finance Basics Quiz
### What does "capital paid in excess of par value" refer to?
- [ ] The total amount of capital a company has.
- [ ] The total value of the shares in the market.
- [x] The amount shareholders pay over the par value of the shares.
- [ ] The nominal value of all issued shares.
> **Explanation:** Capital paid in excess of par value refers to the amount paid by shareholders over and above the par value of the issued shares.
### Why is capital paid in excess of par value recorded separately on the balance sheet?
- [ ] It is a form of debt.
- [ ] It represents retained earnings.
- [x] It reflects additional contributions by shareholders beyond the nominal value.
- [ ] It is used to offset liabilities.
> **Explanation:** This capital is recorded separately to distinguish the additional funds invested by shareholders above the nominal or par value of the shares.
### Which section of the balance sheet features capital paid in excess of par value?
- [ ] Assets
- [ ] Liabilities
- [x] Equity
- [ ] Income Statement
> **Explanation:** Capital paid in excess of par value is reported in the equity section of the balance sheet, as it represents shareholder equity.
### In an IPO, if the par value of a stock is $1 and it is sold at $20, what is the capital paid in excess of par value per share?
- [ ] $19
- [x] $20
- [ ] $1
- [ ] $21
> **Explanation:** The capital paid in excess of par value per share is the difference between the selling price and the par value, which in this case is $19.
### Is it mandatory for companies to issue shares with a par value?
- [x] No, par value can be set at a nominal amount or even zero.
- [ ] Yes, all shares must have a par value.
- [ ] Par value must be proportional to market value.
- [ ] Par value is the same across all companies.
> **Explanation:** Companies often set a nominal par value or even issue shares without a par value, depending on regulatory requirements and corporate policies.
### What fund can be created from capital paid in excess of par value?
- [ ] Dividend Funds
- [ ] Debt Service Fund
- [ ] Employee Bonus Fund
- [x] Additional Paid-In Capital
> **Explanation:** Additional Paid-In Capital (APIC) fund is created from the capital that exceeds the par value of the shares.
### Can the capital paid in excess of par value be used for dividend payments?
- [x] Yes, if the corporate charter allows it.
- [ ] No, it must remain invested.
- [ ] Yes, only if profits are insufficient.
- [ ] Yes, only for stock dividends.
> **Explanation:** Depending on the corporate charter and regulatory restrictions, capital paid in excess of par value can be used for dividend payments.
### For what purposes can the excess capital be used?
- [x] Expansion, debt repayment, or general corporate purposes.
- [ ] Only for purchasing more shares.
- [ ] Only to fund employee salaries.
- [ ] Must be retained indefinitely.
> **Explanation:** The capital paid in excess of par value can be utilized for a variety of purposes including expansion, debt repayment, and other general corporate needs.
### How does capital paid in excess of par value affect the financial statements?
- [ ] Increases liabilities
- [ ] Decreases assets
- [ ] Reduces retained earnings
- [x] Increases shareholder equity
> **Explanation:** This additional paid-in capital increases the shareholder equity section of the balance sheet, reflecting additional investments by shareholders.
### What is another term for capital paid in excess of par value?
- [ ] Retained Income
- [ ] Revenue Surplus
- [x] Additional Paid-In Capital
- [ ] Market Premium
> **Explanation:** Another common term used for capital paid in excess of par value is Additional Paid-In Capital (APIC).
Thank you for exploring the concept of capital paid in excess of par value and testing your knowledge with our quiz. Continue to deepen your understanding of corporate finance principles!
