Paid-in capital excess of par, also known as share premium or capital surplus, represents the excess amount paid by shareholders above the par or stated value of the shares. It arises when shares are issued at a price higher than their par value. Paid-in capital excess of par is part of the shareholders’ equity section of a company’s balance sheet and increases the total equity available to the company. It can be created through various means, including issuing shares at a premium, receiving additional payments from shareholders beyond the par value, or converting convertible securities into shares. The presence of paid-in capital excess of par can impact the company’s financial ratios and dividend policies.
Paid-In Capital in Excess of Par
Paid-in capital in excess of par is a type of contributed capital that represents the amount by which the subscription price of a share of stock exceeds its par value. It can arise when a company issues shares of stock at a price higher than the par value. In other words, it’s the surplus amount paid in by the shareholders over and above the par value.
Unlike par value, which is the legal minimum price at which a company can issue shares, paid-in capital in excess of par is not a liability. It’s considered a form of equity, meaning that it represents the ownership interest of the shareholders.
Benefits of Paid-In Capital in Excess of Par:
- Increases the company’s equity: Paid-in capital in excess of par adds to the shareholder’s equity on the company’s balance sheet, which can make the company more attractive to investors.
- Provides a buffer against losses: In the event that the company incurs losses, paid-in capital in excess of par can help absorb those losses before the share capital is reduced.
- Can be used for dividends: Some jurisdictions allow companies to pay dividends from paid-in capital in excess of par.
- May be required by regulations: In certain cases, companies may be required to maintain a certain level of paid-in capital in excess of par by law or regulation.
Impact on the Balance Sheet:
Paid-in capital in excess of par is recorded on the balance sheet as a separate line item under the shareholder’s equity section. It is added to the share capital to arrive at the total paid-in capital.
| Account | Normal Balance |
|---|---|
| Share Capital | Credit |
| Paid-in Capital in Excess of Par | Credit |
Example:
Suppose a company issues 10,000 shares of stock with a par value of $10 per share. If these shares are issued at a price of $12 per share, the company would receive a total of $120,000. The entry to record this issuance would be:
Debit: Cash $120,000
Credit: Share Capital $100,000
Credit: Paid-in Capital in Excess of Par $20,000
Question 1: What is the accounting treatment for paid-in capital excess of par?
Answer: Paid-in capital excess of par is recorded as a separate account within the equity section of the balance sheet. It represents the amount by which the issue price of a stock exceeds its par value. When a stock is issued at a price above par, the difference between the issue price and the par value is credited to the paid-in capital excess of par account.
Question 2: What are the sources of paid-in capital excess of par?
Answer: Paid-in capital excess of par can arise from various sources, including:
* Premiums paid by investors when purchasing a stock above its par value
* Issuance of stock options or warrants with exercise prices above the par value
* Donations or gifts of stock with a fair market value exceeding the par value
Question 3: How does paid-in capital excess of par affect a company’s financial statements?
Answer: Paid-in capital excess of par primarily impacts a company’s balance sheet. It increases the total equity of the company, thereby enhancing its financial strength. However, it does not affect the company’s income statement or cash flow statement, as it represents a non-operating transaction.
Well, there you have it, folks! You’ve now got the lowdown on “paid-in capital in excess of par.” Don’t let this fancy term intimidate you anymore. It’s simply the extra cash a company gets when it sells its shares for more than their face value. This extra dough helps companies stay financially strong and is a sign of a healthy business. Thanks for sticking with me through this little finance lesson. If you have any more questions, don’t hesitate to drop me a line. And be sure to check back soon for more financial tidbits that are anything but boring!