We all know that the capital of a company consists of shares. The Public Company invites the public to apply for and subscribe to its share capital. For this purpose, it also issues a Prospectus. The company generally issues its shares at par i.e. at its face value. However, a company may choose to bring an Issue of Shares at Premium.
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Issue of Shares at Premium
The issue of shares at premium refers to the issue of shares at a price higher than the face value of the share. In other words, the premium is the amount over and above the face value of a share.
Usually, the companies that are financially strong, well- managed and have a good reputation in the market issue their shares at a premium. For example, if a company issues a share of nominal or face value of ₹10 at ₹11, it issues it at 10% premium.
A company may call the amount of premium from the applicants or shareholders at any stage, i.e. at the time of application, allotment or calls. However, a company generally calls the amount of Premium at the time of allotment.
Accounting treatment of Securities Premium
The company needs to credit the amount of Premium in a separate account i.e. Securities Premium A/c, as it is not a part of the Share Capital. It is actually a gain for the company. As per the Companies Act, 2013 the company shows the credit balance of the Securities Premium A/c under the heading ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.
Also, section 52 of the Companies Act, 2013 states how a company can use the Securities Premium. The following are the provisions regarding this:
- The company can use the amount towards the issue of un-issued shares to the shareholders or members of the company as fully paid bonus shares.
- It can use this amount to write off the preliminary expenses.
- The company may use it to pay the premium on the redemption of debentures or redeemable preference shares.
- It can also use this amount to write off the expenses incurred, commission paid or discount allowed on the issue of any securities or debentures.
- It can also use it for buy-back of own shares or any other securities.
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Journal entries for the issue of shares at Premium
1. Premium is due at the time of application.
Date | Particulars | Amount (Dr.) | Amount (Cr.) | |
1. On receipt of Application money | Bank A/c (application and premium amount) | Dr. | ||
   To Share Application A/c | Cr. | |||
(Being application money received on shares) | ||||
2. Transfer of application money to Share Capital A/c and Securities Premium A/c | Share Application A/c | Dr. | ||
   To Securities Premium A/c | Cr. | |||
   To Share Capital A/c | Cr. | |||
(Being share application money transferred to share capital) | ||||
3. On Share Allotment due | Share Allotment A/c (amount due on allotment) | Dr. | ||
   To Share Capital A/c | Cr. | |||
(Being share allotment due) | ||||
4. Share Allotment money received | Bank A/c (actual amount received) | Dr. | ||
   To Share Allotment A/c | Cr. | |||
(Being share allotment money received) | ||||
5. On Share call due | Share Call A/c | Dr. | ||
   To Share Capital A/c | Cr. | |||
(Being money on share call due) | ||||
6. Share call amount received | Bank A/c | Dr. | ||
   To Share Call A/c | Cr. | |||
(Being share call amount received) |
 2. Premium is due at the time of allotment.
Date | Particulars | Amount (Dr.) | Amount (Cr.) | |
1. On receipt of Application money | Bank A/c (actual amount received) | Dr. | ||
   To Share Application A/c |  Cr. | |||
(Being application money received on shares) | ||||
2. Transfer of application money to Share Capital A/c | Share Application A/c | Dr. | ||
   To Share Capital A/c | Cr. | |||
(Being share application money transferred to share capital) | ||||
3. On Share Allotment and Premium due | Share Allotment A/c (amount due on allotment including premium) | Dr. | ||
   To Securities Premium A/c | Cr. | |||
   To Share Capital A/c | Cr. | |||
(Being share allotment money and premium due) | ||||
4. Share Allotment money received | Bank A/c (allotment and premium amount received) | Dr. | ||
   To Share Allotment A/c | Cr. | |||
(Being share allotment money received) | ||||
5. On Share call due | Share Call A/c | Dr. | ||
   To Share Capital A/c | Cr. | |||
(Being money on share call due) | ||||
6. Share call amount received | Bank A/c | Dr. | ||
   To Share Call A/c | Cr. | |||
(Being share call amount received) |
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Solved Example on Issue of Shares at Premium
Sahni Ltd. issues 10000 equity shares of ₹100 each at 25% premium. Premium is due at the time of allotment. The amount payable is as follows:
Jan 1, 2018: On Application ₹20
Feb 1, 2018: On Allotment ₹75
Mar 1, 2018: On First and Final Call ₹30.
The company makes allotment properly. Show necessary journal entries.
Ans:
Journal Entries
In the books of Sahni Ltd.
Date | Particulars | Amount (Dr.) | Amount (Cr.) | |
1 Jan | Bank A/c | Dr. | 200000 | |
   To Share Application A/c | Cr. | 200000 | ||
(Being application money received on 10000 shares @20 per share) | ||||
1 Feb | Share Application A/c | Dr. | 200000 | |
   To Share Capital A/c | Cr. | 200000 | ||
(Being share application money transferred to share capital) | ||||
1 Feb | Share Allotment A/c | Dr. | 750000 | |
   To Share Capital A/c | Cr. | 500000 | ||
   To Securities Premium A/c | Cr. | 250000 | ||
(Being share allotment due on 10000 shares @50 per share) | ||||
1 Feb | Bank A/c | Dr. | 750000 | |
   To Share Allotment A/c | Cr. | 750000 | ||
(Being share allotment money received) | ||||
1 Mar | Share First and Final Call A/c | Dr. | 300000 | |
   To Share Capital A/c | Cr. | 300000 | ||
(Being money on share call due on 10000 shares @30 per share) | ||||
1 Mar | Bank A/c | Dr. | 300000 | |
   To Share First and Final Call A/c | Cr. | 300000 | ||
(Being share call amount received) |
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