No-par-value stock is a stock that is not assigned a par value or face value. It is also known as no-par stock.
The minimum price at which a class of share can be traded on the initial offering is called the par value of that share. Whenever a business is incorporated, the corporate charter may or may not assign a par value for the shares to be issued by the company.
The face value of a stock is printed on the certificate provided by the company at the time of issuance. When it does not assign a base value or par value, it results in a no-par-value stock. The price is determined by the investors in the open market.
No-par-value stocks do not have any face value associated with them.
Investors who are trading in an open market determine the value of no-par-value stocks. The value depends on market conditions – basically, the supply and demand principle for company shares.
The accounting entry for a no-par-value stock will be a debit to the cash account and credit to the common stock account within shareholder’s equity.
Reasons for Issuing No-Par-Value Stocks
Companies issue and investors accept no-par value stocks because of the following reasons:
The no-par-value stocks provide the companies with the choice to set higher stock prices for public offering in the future.
The par value of the stock is not related to the actual value of the stock in the exchange market.
The companies are liable to the shareholders in case the trading price of the stock drops below the stock’s par value. By issuing no-par-value stocks, the company decreases its liability.
The price of the no-par-value stock goes through natural variations.
No-par-value stocks can be traded in hundreds or thousands of dollars.
The value of the no-par-value stock is the price that can be readily paid by the investors. It is determined by measuring the financial health of the company, competitiveness, and changes in the industry.
Issuing a no-par-value stock prevents the stocks from being misquoted in value. The stocks’ value fluctuates according to market conditions.
Since the stock price fluctuates with the market and differs remarkably from the par value, no-par-value stocks are more attractive to stock issuers.
Accounting Entry of Par Value and No-Par-Value Stocks
State laws may or may not require corporations to have a par value on the issued common stocks. In case corporations have assigned par value to the common stocks, the proceeds will be credited to two accounts of shareholder’s equity.
The common stock account will be credited for the amount up to the par value amount of the shares sold. Any amount paid by the investor in excess of the par value amount of the stock would be credited to the additional paid-in capital account.
The accounting entry will be a debit to cash, a credit to the common stock account, and a credit paid-in capital for the excess of par value amount. If a company has sold no-par-value stocks, the proceeds from the transaction will be credited to the common stock account only. Hence, the accounting entry will be a debit to cash and credit to the common stock account.
For example, a company issues 150 common shares for $3,000, with each share having a $0.50 par value. The accounting entry is a debit of $3000 to the cash account and a credit of $0.50 * 150 = $75 to the common stock account and a credit of $2,925 ($3,000 – $75) to the paid-in capital account.
Therefore, the cash account increases by $3,000, and the shareholder’s equity also increases by an aggregate of $3000 ($75 + $2,925).
In case the company issues 150 no-par-value stocks, the accounting entry is a debit of $3,000 to a cash account and a credit of $3,000 to a common stock account.
The above implies that whether the shares are issued with par value or not, in both cases, the shareholder’s equity and the cash account increase by $3,000. However, a par-value stock increases the liability of a company if the stock price drops drastically.