Examkin

Question

Difficulty: HardIssue of Shares at Par, Premium, and Discount

Orion Holdings Plc offered for public subscription 80,00080,000 ordinary shares of ₦2.00\text{₦}2.00 nominal value each at a discount of 5%5\%. Payments were structured as follows: ₦0.70\text{₦}0.70 on application, ₦0.80\text{₦}0.80 on allotment (reflecting the full discount), and the remaining balance on final call. All shares were fully subscribed and all monies were received in full. Which of the following statements correctly states the total amount credited to the Share Capital Account and the accounting treatment of the Discount on Shares Account?

  1. Share Capital Account is credited with ₦160,000\text{₦}160,000, and Discount on Shares Account is debited with ₦8,000\text{₦}8,000 as a capital loss balance.Answer
  2. B
    Share Capital Account is credited with ₦152,000\text{₦}152,000, and no entry is made in the Discount on Shares Account.
  3. C
    Share Capital Account is credited with ₦160,000\text{₦}160,000, and Discount on Shares of ₦8,000\text{₦}8,000 is credited to the Profit and Loss Account as revenue profit.
  4. D
    Share Capital Account is credited with ₦152,000\text{₦}152,000, and Discount on Shares of ₦8,000\text{₦}8,000 is added to distributable reserves available for dividends.

Answer

The Share Capital Account is credited with the total nominal value of ₦160,000\text{₦}160,000, while the Discount on Shares Account is debited with ₦8,000\text{₦}8,000 representing a capital loss.
When shares are issued at a discount, the Share Capital Account is credited with the full nominal value of the shares (80,000×₦2.00=₦160,00080,000 \times \text{₦}2.00 = \text{₦}160,000). The discount (5% of ₦2.00=₦0.105\% \text{ of } \text{₦}2.00 = \text{₦}0.10 per share, giving a total of ₦8,000\text{₦}8,000) is debited to the Discount on Shares Account as a capital deficit/fictitious asset, ensuring double entry balances with the net cash collected of ₦152,000\text{₦}152,000.

Step-by-Step Solution

1
Calculate the nominal value of total share capital issued.
80,000 shares×₦2.00=₦160,00080,000 \text{ shares} \times \text{₦}2.00 = \text{₦}160,000
Share capital account must always be credited with the full par/nominal value of issued shares.
2
Calculate the per share discount and total discount amount.
Discount per share = 5%×₦2.00=₦0.105\% \times \text{₦}2.00 = \text{₦}0.10. Total discount = 80,000×₦0.10=₦8,00080,000 \times \text{₦}0.10 = \text{₦}8,000.
Discount on shares is calculated as the reduction below nominal issue price.
3
Calculate the net cash received per share and in total.
Issue price per share = ₦2.00−₦0.10=₦1.90\text{₦}2.00 - \text{₦}0.10 = \text{₦}1.90. Total cash received = 80,000×₦1.90=₦152,00080,000 \times \text{₦}1.90 = \text{₦}152,000.
The cash proceeds represent the actual amount collected across application, allotment, and call stages.
4
Determine the required double-entry journal entries.
Debit Cash/Bank Account: ₦152,000\text{₦}152,000; Debit Discount on Shares Account: ₦8,000\text{₦}8,000; Credit Share Capital Account: ₦160,000\text{₦}160,000.
Debit entries must equal credit entries to maintain the accounting equation.

Key Concept

Accounting entries for issue of shares at a discount
Estimated Time:2m 0s
Rate this question

Topics

Issue of Shares at Par, Premium, and Discount

More questions from this topic