The compilation of these Accounting for Share Capital Notes makes students exam preparation simpler and organised.
Shares Issued at Premium
When the company allots shares for the first time these shares can be issued at their nominal price or above or below such a nominal price. The accounting for shares issued at premium and shares issued at discount varies a little. So let us see these accounting treatments and also look at the securities premium account in some detail.
Shares Issued at Premium
When the company decides to issue shares at a price higher than the nominal value or face value we call it shares issued at a premium. It is quite a common practice especially when the company has a great track record and strong financial performance and standing in the market.
So say the face value of a share is Rs 100/- and the company issues it at Rs 110/-. The share is said to have been issued at a 10% premium. The premium will not make a part of the Share Capital account but will be reflected in a special account known as the Securities Premium Account.
Now, this amount of premium can be called up by the company at any given time, i.e. with any call. The general norm is to collect the premium with either allotment or application money, rarely with call money. The premium amount as we discussed is credited to the Securities Premium Account. This account is found under the heading of Reserves and Surplus on the liabilities side of the Balance Sheet.
Securities Premium Account
Now according to the Companies Act 2013, there are some laws about the utilization of the Securities Premium Account. It states the specific purposes for which this balance may be used. So the account can only be used for such specific purposes and no other purpose.
- To issue fully paid-up bonus shares to its existing shareholders. However, you cannot exceed the limit of the unissued share capital of the company.
- Securities Premium Account can be used for writing off any preliminary expenses of the company.
- To write off expenses of issue of shares and debentures, such as commission paid or discount given on the issue of shares.
- The balance can also be used to provide for the premium that is payable on the redemption of debentures or of preference shares of the company.
- And finally, it can be utilized by the company to buy back its own shares.
Accounting Treatment for Shares Issued At Premium
The accounting treatment for shares issued at a premium will differ slightly from those issued at par. Let us see some journal entries for the same.
When Premium is received with Application money
If the premium amount is called and received with the application money we do not credit it directly to the Securities Premium A/c. The application is received but it could be rejected as well, so we wait until the application is accepted and finalized. The entries will be as follows:
When Premium is received with Allotment money
Sometimes the premium will be collected with the allotment money. In this case, the entries will be as follows:
One point to remember is if any advance money was received during the application, then such money may be adjusted towards the share allotment account. However, first, the advance should be adjusted against the nominal value of the shares, and if still balance is left then be adjusted against the securities premium account.
ABC and Company issued 1000 shares of Rs 10/- each at Rs 12/-. The money was payable as per the following schedule.
- On Application Rs 2/-
- Allotment Rs 5/- (including premium)
- Final Call Rs 5/-
Applications were received for 2000 shares. 1000 applications were rejected and the money was refunded. There were no calls-in-arrears or calls-in-advance. Pass the journal entries for the same in the books of ABC and Company.
In the books of ABC & Co,