Issue of shares at premium

Issue of shares at premium

When a company issues its shares at a price more than the facevalue, it is said to be issued at premium. Premium is the excess money collected over and above the face value of the share. When share of Rs.10 (face value) are issued at Rs.12, it is said to be issued at a premium of Rs.2.

When shares are issued at premium, the amount of premium shall be credited to a separate account called as ‘Securities Premium
Account’1. It is not a part of the share capital. It is shown separately in the Balance sheet under the heading ‘Reserves and Surplus’. Under Sec. 78 the amount to the credit of the securities premium account may be used for the following purposes:

1) issue of fully paid bonus shares

2) writing off the preliminary expenses

3) writing off expenses like commission paid or discount allowed on shares / debentures and

4) for the premium payable on redemption of preference shares / debentures.

The amount of premium can be collected with the application money or with the allotment money. But normally it is collected with the allotment money only. The accounting entry passed to record the same is:

a) Share Allotment A/c Dr [No. of shares allotted x allotment and premium money per share]

To Share Capital A/c [No. of shares allotted x allotment money per share]
To Securities Premium A/c [No. of shares allotted x premium money per share]
(amount due on allotment of shares @Rs—per share including premium)

Bank A/c Dr.

To Share Allotment A/c

(money received on allotment including premium )

Illustration :

Raja & Rani Ltd. issued 10,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows.

On application Rs.3

On allotment Rs.5 (including premium)

On first call Rs.2

On second & final call Rs.2

All these shares were duly subscribed and money due were fully received. Pass journal entries prepare ledger accounts and also show the entries in the Balance sheet.

Solution:

Raja & Rani Ltd.
Journal Entries

Date	Particulars	Debit Rs.	Credit Rs.
	Bank A/c Dr	30,000
	To Share Application A/c		30,000
	(Application money on 10,000 shares received @ Rs.3 per share)
	Share Application A/c Dr	30,000
	To Share Capital A/c		30,000
	(Application money transferred to share capital)
	Share Allotment A/c Dr	50,000
	To Share Capital A/c		30,000
	To Securities Premium A/c		20,000
	(Allotment money and share premium due on 10,000 shares)
	Bank A/c Dr	50,000
	To Share Allotment A/c		50,000
	(Allotment money and premium
	amount received)
	Share First Call A/c Dr	20,000
	To Share Capital A/c		20,000
	(First Call amount due on 10,000 shares @ Rs.2/- per share)
	Bank A/c Dr
	To Share First call A/c 20,000	20,000
	(First call amount received)		20,00C0
	Share Second & Final Call A/c Dr	20,000
	To Share Capital A/c		20,000
	(Final Call amount due on 10,000 shares @ Rs.2/- per share)
	Bank A/c Dr	20,000
	To Share Second & Final Call A/c		20,000
	(Being final call amount received)

Raja & Rani Ltd.
Ledger Accounts
Dr. Bank Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Application A/c	30,000	By Balance c/d	1,20,000
To Share Allotment A/c	50,000
To Share First call A/c	20,000
To Share Second & Final call A/c	20,000
	1,20,000		1,20,000
To Balance b/d	1,20,000

Dr. Share Application Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Application A/c	30,000	By Bank A/c	30,000
	30,000		30,000

Dr. Share Allotment Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Capital A/c	30,000	By Bank A/c	50,000
To Securities Premium A/c	20,000
	50,000		50,000

Dr. Securities Premium Account Cr.

Particulars	Rs.	Particulars	Rs.
To Balance c/d	20,000	By Share Allotment A/c	20,000
	20,000		20,000
		By Balance b/d	20,000

Dr. Share First Call Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Capital A/c	20,000	By Bank A/c	20,000
	20,000		20,000

Dr. Share Second and Final Call Account Cr.

Particulars	Rs.	Particulars	Rs.
To Share Capital A/c	20,0 00	By Bank A/c	20,000
	20,000		20,000

Dr. Share Capital Account Cr.

Particulars	Rs.	Particulars	Rs.
By Balance c/d	1,00,000	By Share Application A/c	30,000
		By Share Allotment A/c	30,000
		By First Call A/c	20,000
		By Second & Final Call A/c	20,000
	1,00,000		1,00,000
		By Balance b/d	1,00,000

Extracts from Balance Sheet of Raja & Rani Ltd.

Liabilities	Rs.	Liabilities	Rs.
Share Capital		Current Assets:
Authorised Capital	—-	Bank	1,20,000
Issued Capital
10,000 shares @ Rs.10 each	1,00,000
Subscribed Capital
10,000 shares @ Rs.10 each	1,00,000
Called up Capital
10,000 shares @ Rs.10 each	1,00,000
Paid up Capital
10,000 shares @ Rs.10 each	1,00,000
Reserves & surplus:
Securities Premium	20,000
	1,20,000		1,20,000

Leave a Reply