Issue of Shares at Premium

Issue of Shares

A company’s capital is made up of shares. The public is invited to apply for and subscribe to a public company’s shares. It also creates a prospectus for this purpose. The corporation often issues its shares at face value or par. On the other hand, a firm may choose to issue at a premium price.

A company’s shares can be issued at par, at a premium, or even at a discount. When the stock is sold at its nominal value, it is said to be at par. The premium is the amount paid for shares sold at a higher price than their nominal value. Shares sold at a discount, of course, are less expensive than their face/nominal value.

Issue of Shares at Premium

The term “premium issue” refers to the issuance of shares at a price higher than the share’s face value. In other words, the premium is the amount paid for a share over and beyond its face value.

Companies that are financially solid, well-managed, and have a positive market reputation typically issue their shares at a premium. For example, if a corporation issues a share with a nominal or face value of $20 at $22, it is issuing it at a 10% premium. 

A firm may demand payment of the premium from applicants or shareholders at any time, including during the application, allotment, or calling. A firm, on the other hand, usually calls the amount of premium at the time of allotment. 

Accounting Treatment of Issues of Shares at a Premium

Since the premium is not part of the Share Capital, it must be credited to a separate account called Securities Premium A/c. It’s a gain for the corporation. According to the Companies Act of 2013, the credit balance of the Securities Premium A/c is shown on the liabilities side of the Balance Sheet under the heading ‘Reserves and Surplus.’ Section 52 of the Companies Act of 2013 explains how a business can employ the Securities Premium. 

The following are the rules in this regard:-

• The funds might be used to issue previously unissued shares to the company’s shareholders or members as fully paid bonus shares
• This sum can be used to deduct the preliminary expenses
• It could be used to pay the redemption premium on debentures or redeemable preference shares
• It can also utilise this money to write off any expenses, commissions paid, or discounts granted on securities or debentures issued

Furthermore, it can also be used to purchase back its stock or other assets

Journal entries for the issue of shares at a premium.

1. At the time of share application:

When the funds are received

Bank Account Dr

              To Share Application A/c 

(Share Application Received)

Transfer of funds to respective accounts

Share Application A/c Dr

               To Share Capital A/c 

               To Share Premium A/c 

(Transfer application money)

2. At the time of share allotment

Bank A/c Dr

                To Share Allotment A/c 

(Share allotment money received)

Share Allotment A/c Dr

                To Share Capital A/c

                To Share Premium A/c 

(Transfer allotment money)

Examples:

ABC Ltd. issues 100 equity shares of ₹10 each at a 30% premium. Premium is due at the time of application. The amount payable is as follows:

Apr 1, 2021: On Application ₹5

May 1, 2021: On Allotment ₹5

Sep 1, 2021: On First and Final Call ₹3

Journal Entries of the Share allotment Process in the books of ABC Ltd.

(Apr 1, 2021: On Application ₹5)

1 Apr, 2021 Bank Account Dr                       ₹5

                    To Share Application A/c Cr    ₹5

Apr 2, 2021, Share Application A/c Dr         ₹5

                    To Share Capital A/c Cr           ₹2

                    To Share Premium A/c Cr         ₹3

(May 1, 2021: On Allotment ₹5)

May 1, 2021, Bank A/c Debit                          ₹5

                      To Share Allotment A/c Cr      ₹5

May 1, 2021, Share Allotment A/c Dr             ₹5

                      To Share Capital A/c Cr           ₹5

(Sep 1, 2021: On First and Final Call ₹3)

Sep 1, 2021, Bank A/c Dr                                 ₹3

                       To Share, Call A/c Cr               ₹3

Sep 1, 2021, Share Call A/c Dr                        ₹3

                       To Share Capital A/c                ₹3

These are the required journal entries for the issue of share at a premium in the books of ABC Ltd. The company issued a share at 30% Premium. As the share price was ₹10, the premium, at 30%, will be ₹3 per share. 

Share premium was due at the time of the share application. Hence ₹3, out of ₹5 received at the time of share application is attributed to the Share Premium Account. As far as journal entries subsequently transferred share capital accounts as per required accounting practices.

Conclusion:

Issue of shares at a premium indicates that the share could fetch a greater price than the face value of the shares. This essentially means that the company has a solid financial and good reputation in the eyes of Investors. However, the issue of premium shares attracts different treatment in terms of accounting, depending upon when the actual receipt of premium happened.