What Is a Corporation's Paid-In Capital Account?
Companies issue stock to raise funds for operations and growth plans. Paid-in capital, also known as contributed capital, is shown in the shareholders' equity section of a company's balance sheet. The surplus amounts received by the company when it issues stock are recorded in the paid-in capital account, which also is adjusted when the company issues stock dividends.
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Facts
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The paid-in capital is the amount received over and above a stock's par value. The par value is insignificant for common stocks, but it has meaning for preferred stocks because the dividends are based on it. Preferred stocks usually trade in lower volumes and price ranges than common stocks. Common and preferred paid-in capital values are accounted for separately. In some states, companies must report the par and paid-in capital values separately, while in others, the par value does not have to be reported. Paid-in capital is different from retained earnings, which is the accumulated net income after dividend payments.
Stock Issue
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The paid-in capital account is usually adjusted when a company issues stock. For example, if a company's common stock has a par value of $0.10 per share and it issues 1,000 shares at $10 share, then the paid-in capital is $9.90 ($10 - $0.10) per share. The cash account is debited or increased by $10,000 ($10 x 1,000), the common stock account is credited or increased by $100 ($0.10 x 1,000) and the paid-in capital account is credited or increased by $9,900 ($9.90 x 1,000). If there is no requirement to indicate the par value, the accounting entries are to debit cash and credit common stock by $10,000 each.
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Stock Dividends
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Stock dividends may be paid instead of cash dividends if the company wants to pay a dividend but preserve its cash. A small-size dividend of less than 20 to 25 percent of the float (shares outstanding and trading on stock markets) is usually valued at the market price, otherwise the par value is used. For example, if a company with a float of a million $1 par value shares declares a 10 percent dividend and pays it when the market price is $10 per share, then the number of shares paid as dividends is 100,000 (0.10 x 1,000,000) and the paid-in capital is $9 ($10 - $1). The retained earnings account is debited or decreased by $1 million (100,000 x $10), the common stock account is credited or increased by $100,000 (100,000 x $1) and the paid-in capital account is credited or increased by $900,000 (100,000 x $9).
Considerations: Treasury Stock
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Treasury stock is the stock bought back by a company. The paid-in capital account is not affected in a stock buyback transaction. However, if the treasury shares are reissued, the accounting is the same as for a stock issuance, except that the par value is the average buyback share price. For example, if 1,000 shares are bought back at $5 each and 500 are then reissued at $7 each, then cash is debited by $3,500 (500 x $7), treasury stock is credited by $2,500 (500 x $5) and paid-in capital is credited by $1,000 [500 x ($7 - $5) = 500 x $2].
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