Definition and explanation
Sometimes a company issues its shares at premium, that is to say, at a higher price than the face value, provided there is a public demand for such shares at a higher value.
The premium received on issue shares must not be mixed with the share capital but must be credited to separate account called “Share Premium Account” and shown as 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 amount is received in lump sum. The entries should be:
|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 bank. The entries should be:
On receipt of applications:
|Share applications —————————- Dr|
|Share Capital ————————————– Cr.|
|Share Premium ————————————- Cr.|
John Chemical Limited having an authorized capital of $5,00,000 divided into 1,00,000 shares of $5 each, issued 30,000 shares 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 balance sheet of the company.