Assessments on Capital Stock

Definition

The term assessments on capital stock refers to a provision that allows a company to charge shareholders an additional amount above the price paid.  Assessable capital stock is allowed by some states, and is typically associated with shares issued by financial institutions.

Explanation

An assessment on capital stock can occur anytime the shares are not fully paid for by investors, and the securities contain a provision that allows them to be called in.  Typically, this type of stock is associated with the financial and bank industries; and an assessment would be a rare event; typically occurring if the corporation is insolvent or as part of a bankruptcy proceeding.  When an assessment occurs, holders of capital stock are required to pay the amount owed or forfeit the right to the shares they own.

When a company receives the assessment paid by shareholders, its accounting department must determine if the original shares were sold at a discount or premium.  If the shares were originally sold at a premium, the proceeds from shareholders should be credited to Additional Paid-in Capital.  If the shares were originally sold at a discount, the corresponding discount account is credited.

Related Terms

par value stock, stock issuance costs, reacquisition of shares