Question

Is preferred stock always valued at its original issue price in the balance sheet? If yes, Why can't I use the market value?

Answer 1

In your company balance sheet you value your Co. preferred stock (in the Equity, on the Liabilities side) at issue price. This way the Balance sheet will ... balance.

Reason being is that the accounts are built using a historical cost method and not a mark-to-market method. The problem with using market price for the preferred stock is that the Balance sheet will no longer balance. Consider that you issued 1,000 stock at $100. You received $100,000. Now assets went up by $100,000 (cash) and Liabilities went up by $100,000 (Equity). all good. But if next year you observe stockholders trading this paper between them at $115, you can't value the preferred stock at $115,000 in your balance sheet because there would be a break between your assets and your liabilities - it wouldn't balance any more!