Issue of Shares at Premium
Definition and Explanation
A company may issue its shares at a premium (i.e., a higher price than the face value), provided there is demand for such shares at a higher value.
The premium received on issued shares must not be mixed with the share capital. Instead, it must be credited to a separate account known as the share premium account and shown as a separate item on the liability side of the balance sheet.
Journal Entries for Issuance of Shares at a Premium
If shares are issued to the directors or underwriters at a premium and the amount is received in a lump sum, the following entries should be made:
|Bank —————————- Dr|
|Share Capital —————————- Cr.|
|Share Premium —————————- Cr.|
If shares are issued at a premium to the public after the receipt of application money through the bank, the entries should be:
|Share applications —————————- Dr|
|Share Capital ————————————– Cr.|
|Share Premium ————————————- Cr.|
John Chemical Limited has an authorized capital of $500,000 divided into 100,000 shares valued at $5 per share. 30,000 shares were issued to the directors and 50,000 shares to the general public at a premium of $1 per share. Subscriptions were received in full and these shares were allotted.
Required: Give general entries and the balance sheet of the company.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.