Which of the following statements about par value is true?

• A. Par value determines the amount of dividends a company must pay to shareholders.
• B. Par value represents the legal capital per share that must be retained in the business for the protection of corporate creditors.
• C. Par value is the current market price of a company's stock.
• D. Par value is the amount a shareholder pays above the stated value of the stock.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of par value. Par value is the nominal or face value assigned to a share of stock by the company issuing it. It is typically a very small amount and does not reflect the market value of the stock.
2. Step 2: Clarify the legal significance of par value. Par value represents the legal capital per share that must be retained in the business to protect corporate creditors. This means the company cannot distribute this amount as dividends or use it for other purposes.
3. Step 3: Eliminate incorrect statements. For example, par value does not determine the amount of dividends a company must pay to shareholders, nor does it represent the current market price of a company's stock.
4. Step 4: Address the statement about shareholders paying above the stated value. Par value is not the amount a shareholder pays above the stated value of the stock; it is simply the minimum legal value assigned to the stock.
5. Step 5: Conclude that the correct statement is: 'Par value represents the legal capital per share that must be retained in the business for the protection of corporate creditors.' This aligns with the legal definition and purpose of par value in financial accounting.