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§
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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)].
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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.
Related Terms§
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§
- Investopedia – Additional Paid-In Capital
- Corporate Finance Institute – Equity Financing
- Financial Accounting Standards Board (FASB)
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§
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.
