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Chapter 15: Question 6Q (page 810)

What is meant by par value, and what is its significance to stockholders?

Short Answer

Expert verified

The par value is a fixed and arbitraryamount per share attributed to the shares by the incorporators. It helps to determine the overall value of the shares issued.

Step by step solution

01

Meaning of Par Value

The face value of a bond is referred to as par value. The par value determines its maturity value and the dollar value of coupon payments, which is why it is essential for bond or fixed-income instruments.

02

Significance of par value to stockholders

Except maybe when shares are first offered to the public, the par value has little to no impact on shareholders.

Market forces of demand and supply decide the market prices of stock shares that most shareholders must acquire for those shares; hence the par value has no bearing on those prices.

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Most popular questions from this chapter

(Stock Dividend, Cash Dividend, and Treasury Stock) Mask Company has 30,000 shares of \(10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2017, Mask purchased 1,000 shares of treasury stock for \)18 per share. Mask uses the cost method to account for treasury stock. On September 14, 2017, Mask sold 500 shares of the treasury stock for \(20 per share.

In October 2017, Mask declared and distributed 1,950 shares as a stock dividend from unissued shares when the market price of the common stock was \)21 per share.

On December 20, 2017, Mask declared a $1 per share cash dividend, payable on January 10, 2018, to shareholders of record on December 31, 2017.

Instructions

  1. How should Mask account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet on December 31, 2017?
  2. How should Mask account for the stock dividend, and how would it affect the stockholders’ equity at December 31, 2017? Why?
  3. How should Mask account for the cash dividend, and how would it affect the balance sheet at December 31, 2017? Why?

Before Gordon Corporation engages in the treasury stock transactions listed on the next page, its general ledger reflects, among others, the following account balances (par value of its stock is \(30 per share).

Paid-in Capital in Excess of Par Common Stock Retained Earnings

Common Stock

\)99,000 \(270,000 \)80,000

Instructions

Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes.

(a) Bought 380 shares of treasury stock at \(40 per share.

(b) Bought 300 shares of treasury stock at \)45 per share.

(c) Sold 350 shares of treasury stock at \(42 per share.

(d) Sold 110 shares of treasury stock at \)38 per share.

Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a \(500 par, 12% subordinated debenture and 10 shares of \)5 par common stock. The units were sold to outside investors for cash at \(880 per unit. Prior to this sale, the 2-week ask price of common stock was \)40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

Instructions

  1. Prepare the journal entry to record Evans’ transaction, under the following conditions.
  2. Employing the incremental method.
  3. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
  4. Briefly explain which method is, in your opinion, the better method.

Satchel Inc. purchases 10,000 shares of its own previously issued \(10 par common stock for \)290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?

What features or rights may alter the character of preferred stock?
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