Issue, Forfeiture, Reissue of Shares

Issue of Shares at Premium

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:

  1. 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.
  2. It can use this amount to write off the preliminary expenses.
  3. The company may use it to pay the premium on the redemption of debentures or redeemable preference shares.
  4. 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.
  5. It can also use it for buy-back of own shares or any other securities.

Issue of Shares at Premium

Source: shutterstock.com

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)

 

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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