Page 491 - Accounting Principles (A Business Perspective)

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covering shares sold, issues new stock certificates, and makes appropriate entries in the stockholders' ledger. It
sends new certificates to the stock registrar, typically another bank, that maintains separate records of the shares
outstanding. This control system makes it difficult for a corporate employee to issue stock certificates fraudulently

and steal the proceeds.
The minutes book, kept by the secretary of the corporation, is (1) a record book of the actions taken at
stockholders' and board of directors' meetings and (2) the written authorization for many actions taken by
corporate officers. Remember that all actions taken by the board of directors and the stockholders must be in
accordance with the provisions in the corporate charter and the bylaws. The minutes book contains a variety of
data, including:
• A copy of the corporate charter.

• A copy of the bylaws.
• Dividends declared by the board of directors.
• Authorization for the acquisition of major assets.
• Authorization for borrowing.
• Authorization for increases or decreases in capital stock.

Par value and no-par capital stock
Many times, companies issue par value stock. Par value is an arbitrary amount assigned to each share of a
given class of stock and printed on the stock certificate. Par value per share is no indication of the amount for which
the stock sells; it is simply the amount per share credited to the capital stock account for each share issued. Also,
the total par value of all issued stock often constitutes the legal capital of the corporation. The concept of legal

capital protects creditors from losses. Legal capital, or stated capital, is an amount prescribed by law (usually
the par value or stated value of shares issued) below which a corporation may not reduce stockholders' equity
through declaration of dividends or other payments to stockholders. Stated value relates to no-par stock and is
explained below. Legal capital does not guarantee that a company can pay its debts, but it does keep a company
from compensating owners to the detriment of creditors. The formula for determining legal capital is:
LegalCapital=SharesIssued X ParStatedValue
In 1912, the state of New York first enacted laws permitting the issuance of no-par stock (stock without par
value). Many other states have passed similar, but not uniform, legislation.
A corporation might issue no-par stock for two reasons. One reason is to avoid confusion. The use of a par value

may confuse some investors because the par value usually does not conform to the market value. Issuing a stock
with no par value avoids this source of confusion.
A second reason is related to state laws regarding the original issue price per share. A discount on capital
stock is the amount by which the shares' par value exceeds their issue price. Thus, if stock with a par value of USD
100 is issued at USD 80, the discount is USD 20. Most states do not permit the original issuance of stock at a
discount. Only Maryland, Georgia, and California allow its issuance. The original purchasers of the shares are
contingently liable for the discount unless they have transferred (by contract) the discount liability to subsequent

holders. If the contingent liability has been transferred, the present stockholders are contingently liable to creditors
for the difference between par value and issue price. Although this contingent liability seldom becomes an actual
liability, the issuance of no-par stock avoids such a possibility.

Accounting Principles: A Business Perspective 492 A Global Text