Issue of Shares at Premium | Security Premium

Meaning of Share

Share is an ownership document. A limited company issues shares to collect capital. 

As saying, every long journey starts with first step; every limited company is established with the help of equity shares (common shares, common stocks, ordinary shares).

In other words no equity shares, no limited company.

Share is the fractional part of authorized capital.

Total or authorized capital of the company is divided into small fraction.

The person or firm who purchases shares of the company is known as shareholder.

Shares are transferable to other person and company.

 

Issue of Shares at Premium for Cash

When a company issues its shares more than par or face value, it is called shares issued at premium.

There is not limitation for premium.

The company can issue its shares at any price.

Premium on issue of share is capital profit.

It is credited in journal entry and is shown in liabilities side of balance sheet.

 

Value of one share $/₹/Rs 100   ®   issued at $/₹/Rs 110, 120, 150 or more

Note: There are two methods for share premium. Due method and receipt methods.

Due method is applied more than receipt. Therefore only due method is applied in this website.

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

PROBLEM: 5

ABC Company Ltd issued 50,000 equity shares $/₹/Rs 100 each for Rs 120 per share. Amount payable as under:

On application             Rs 40

On allotment                Rs 50

On first and final call   Rs 30

All the shares were issued, called and paid up. The entire amount was duly received.

Required: Journal entries

[Answer: Share premium = 10,00,000;

SOLUTION:

Here, company issued shares at $/₹/Rs 120; it means 120 – 100 = 20 premium.

Lack of information, company adjusts discount on allotment.

If question indicates to adjust premium on application, we should adjust on application,

If question indicates to adjust premium on allotment, we should adjust on allotment,

If question indicates to adjust premium on first call, we should adjust on first call,

If question indicates to adjust premium on final call, we should adjust on final call,

 

If question indicates to adjust premium on application, we should adjust on application.

Shares Issued	Issued Price	Installation		Arrears and Advance		Share Applied	Shares Allotted
50,000	100 + 20P	Application Allotment First and final call	40 [20C + 20P] 50 30

Note: lack of information, premium is adjusted with allotment. C is capital and P is premium

 

If question indicates to adjust premium on allotment, we should adjust on allotment.

Shares Issued	Issued Price	Installation		Arrears and Advance		Share Applied	Shares Allotted
50,000	100 + 20P	Application Allotment First and final call	40 50  [30C + 20P] 30

Note: lack of information, premium is adjusted with allotment. C is capital and P is premium

 

If question indicates to adjust premium on call, we should adjust on call.

Shares Issued	Issued Price	Installation		Arrears and Advance		Share Applied	Shares Allotted
50,000	100 + 20P	Application Allotment First and final call	40 50  30 [20C + 20P]

Note: lack of information, premium is adjusted with allotment. C is capital and P is premium

 

Journal Entries

In the book of ABC Company Ltd

Date	Particulars		LF	Amount	Amount
Received	Amount received on application Bank account                                            To Equity share application account (Being- amount received on 50,000 shares @ Rs 40)	Dr		20,00,000	20,00,000
Transfer	Amount transfer of application Equity share application account          To Equity share capital account (Being- amount transfer of application to capital account)	Dr		20,00,000	20,00,000
Due	Amount due/receivable on allotment Equity share allotment account            To Equity share capital account          To Equity share premium (Security Premium) (Being- amount due/receivable on allotment and Premium adjusted)	Dr		25,00,000	15,00,000 10,00,000
Received	Amount received on allotment Bank account                                            To Equity share allotment account  (Being- amount received on 50,000 shares @ Rs 50)	Dr		25,00,000	25,00,000
Due	Amount due/receivable on first and final call Equity share first and final call account            To Equity share capital account (Being- amount due/ receivable on calls)	Dr		15,00,000	15,00,000
Received	Amount received on first and final call Bank account          To Equity share first and final call account (Being- amount received on 50,000 shares @ Rs 40)	Dr		15,00,000	15,00,000

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PROBLEMS   AND   ANSWERS

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

Basic Problem: 5A                    [issued at premium]

Duggar Foods Limited issued 10,000 equity shares of $/₹/Rs 100 each at 10% premium. The amount was payable as following:

Payable                                  amount                        

On application                       Rs 30                   

On allotment                         Rs 40 (with premium) 

On first call                            Rs 25                   

On second and final call       Rs 15                   

All the shares were subscribed, allotted and the entire amount was received.

Required: Journal entries and cash book

[Answer: Premium Rs = 100,000; Total of cash book = Rs 11,00,000

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

Basic Problem: 5B                    [issued at premium]

Janakpur Foods Limited had been registered with an authorized capital of $/₹/Rs 20,00,000 divided into 20,000 equity shares of $/₹/Rs 100 each. The Company issued 10,000 equity shares at 10% premium. Amount was received after 10 days of called up. The amount was payable as following:

Payable                                    amount                                       Due date

On application                        Rs 20                                            [on 1 January]

On allotment                           Rs 30 (with premium)                [on 15 February]

On first call                             Rs 40                                            [on 10 March]

On second and final call         Rs 20                                            [on 5 April]

All the shares were subscribed, allotted and the entire amount was received.

Required: Journal entries cash book and balance sheet

[Answer: Premium = 100,000]

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