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No Par Value Stock Definition

No par value stock is shares issued without a listed par value on the certificate. Historically, par value was the initial sale price but companies set it very low to avoid liability if the market price fell below par value. Some states allow no par stock, which eliminates this theoretical liability. With no par value stock, the price is determined solely by what investors are willing to pay based on their assessment of the company's value. When no par stock is sold, cash is debited and common stock is credited for the full amount, whereas a par value stock issues would credit common stock for the par value and additional paid-in capital for amounts above par value.

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160 views2 pages

No Par Value Stock Definition

No par value stock is shares issued without a listed par value on the certificate. Historically, par value was the initial sale price but companies set it very low to avoid liability if the market price fell below par value. Some states allow no par stock, which eliminates this theoretical liability. With no par value stock, the price is determined solely by what investors are willing to pay based on their assessment of the company's value. When no par stock is sold, cash is debited and common stock is credited for the full amount, whereas a par value stock issues would credit common stock for the par value and additional paid-in capital for amounts above par value.

Uploaded by

blezyl
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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No par value stock definition

December 24, 2020


What is No Par Value Stock?

No par value stock is shares that have been issued without a par value listed on the face of the
stock certificate . Historically, par value used to be the price at which a company initially sold
its shares. There is a theoretical liability by a company to its shareholders if the market price of
its stock falls below the par value for the difference between the market price of the stock and
the par value.

Companies set the par value as low as possible in order to avoid this theoretical liability. It is
common to see par values set at $0.01 per share, which is the smallest unit of currency. Some
states allow companies to issue shares with no par value at all, which eliminates the theoretical
liability payable by the issuer to shareholders. If common stock has no par value, a company
prints "no par value" on the face of any stock certificates that it issues. This information may
also be noted in the issuer’s articles of incorporation .

When a company has no par value stock, there is effectively no minimum baseline from which
to price the stock, so the price is instead determined by the amount that investors are willing to
pay, based on their perceived value of the issuing entity; this may be based on a number of
factors, such as cash flows, the competitiveness of the industry, and changes in technology.

When a company sells no par value stock to investors, it debits cash received and credits the
common stock account. If a company had instead sold common stock to investors that had a par
value, then it would credit the common stock account up to the amount of the par value of the
shares sold, and it would credit the additional paid-in capital account in the amount of any
additional price paid by investors in excess of the par value of the stock.

The general trend among state governments is to allow the use of no par value stock, since the
practice of issuing par value stock at the absolute minimum amount has essentially eliminated
the reason for having par value. Thus, we may eventually see the elimination of the par value
concept as it relates to company stock.
The use of no par stock does not apply to other types of securities, such as bonds, where the par
value is essentially the same as the face value of the instrument.

Example of No Par Value Stock

ABC International sells 1,000 shares of no par value stock to investors for $10 per share. It
records the transaction with this entry:
  Debit Credit

Cash 10,000  

     Common Stock   10,000

If ABC had instead issued the shares with a par value of $0.01, then the transaction would be
recorded as:

  Debit Credit

Cash 10,000  

     Common Stock   10

     Additional paid-in capital   9,990

Terms Similar to No Par Value Stock

No par value stock is also known as no par stock.

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