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Feb 17, 2007 12:48 pm

Work related question...

Can this ever be a negative value (debit):

Paid in = capital

On inception of a company, they are not stating their shares outstanding times par because they say "paid in capital" would be negative with this scenario.

I'm not sure if this made sense, but if it did to anyone here, an answer would be much appreciated.

Plus it will help me pick up some brownie points.

Feb 17, 2007 1:58 pm

If you can give me a more info on the situation that would be helpful. 


I majored in accounting and a close friend of mine from those days is brilliant when it comes to financial statements.  I'd be happy to ask him for you if you can give me a little more info.


(By the way if I'm not mistaken, I do believe it is possible to have negative PIC.) 

Feb 17, 2007 6:23 pm

Sounds like shares were issued without the shareholders depositing the cash to cover par value of shares issued.  If this happened, I would debit an owner receivable for the deficiency and show full par under common stock.  If the owner(s) did not want to pay this in, you could simply debit retained earnings and credit the receivable as the company starts generating retained profits, or you could leave the receivable on the books.


That's my guess, but I'm not saying that it's the right way or the only way...it's just what I would do if I were in charge of the books.

Feb 17, 2007 7:31 pm
Slim2None:

Work related question...

Can this ever be a negative value (debit):

Paid in = capital

On
inception of a company, they are not stating their shares outstanding
times par because they say "paid in capital" would be negative with
this scenario.

I'm not sure if this made sense, but if it did to anyone here, an answer would be much appreciated.

Plus it will help me pick up some brownie points.





Usually shares are issued with a nominal par value (i.e $0.01) and the
excess that is paid for them becomes Paid in capital excess of par.



So no, paid in capital can never be a negative number. Stock buybacks
will reduce paid in capital, and if you contine doing them, they will
eventually start chewing up retained earnings.



It is extremely rare to issue
shares whose par value is in excess of the the initial offering price.
Such shares are "assesable" since you can asses the shareholders with a
capital call(s) to make the shares fully paid up.



This is why you often see in SEC registration statements that the shares are "fully paid up and non-assesable."



===

Quick review of Corporate Equity Capital



From sale of Equity

---



Par value of Common Stock

Liquidation/Redemption value of Preferred Stock.

Paid in Capital XS of par



---

From Operations:



Retaining Earnings (Can be negative)

Accumulated Other Comprehensive Income/Loss (Can be negative)



===

Companies can reduce Equity by.



1) Losing money (Lowers RE)

2) Writing down assets (Creates negative AOCI)

3) Paying dividends (Lowers RE)

4) Buying back stock (Lowers PIC)

Feb 18, 2007 9:00 am

Thanks for the feedback, guys.