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

Apex Ventures Plc issued 60,00060,000 ordinary shares of nominal value ₦2.00\text{₦}2.00 each at an issue price of ₦2.50\text{₦}2.50 per share. All issued shares were fully subscribed and paid for. How should the total cash proceeds of ₦150,000\text{₦}150,000 be credited in the company's ledger accounts?

  1. Share Capital Account credited with ���120,000\text{���}120,000 and Share Premium Account credited with ₦30,000\text{₦}30,000Answer
  2. B
    Share Capital Account credited with ₦120,000\text{₦}120,000 and Profit and Loss Account credited with ₦30,000\text{₦}30,000
  3. C
    Share Capital Account credited with ₦150,000\text{₦}150,000 and Share Premium Account credited with ₦0\text{₦}0
  4. D
    Share Capital Account credited with ₦30,000\text{₦}30,000 and Share Premium Account credited with ₦120,000\text{₦}120,000

Answer

Share Capital Account credited with ₦120,000\text{₦}120,000 and Share Premium Account credited with ₦30,000\text{₦}30,000
When shares are issued at a premium (issue price higher than nominal value), double-entry principles dictate that Share Capital Account is credited with the total nominal value of shares issued (60,000×₦2.00=₦120,00060,000 \times \text{₦}2.00 = \text{₦}120,000) and the capital surplus is credited to Share Premium Account (60,000×₦0.50=₦30,00060,000 \times \text{₦}0.50 = \text{₦}30,000).

Step-by-Step Solution

1
Calculate the total nominal share capital value.
60,000 shares×₦2.00=₦120,00060,000 \text{ shares} \times \text{₦}2.00 = \text{₦}120,000
Share capital is always recorded at its face (nominal) value.
2
Calculate the premium per share and total share premium.
Premium per share = ₦2.50−₦2.00=₦0.50\text{₦}2.50 - \text{₦}2.00 = \text{₦}0.50; Total Share Premium = 60,000×₦0.50=₦30,00060,000 \times \text{₦}0.50 = \text{₦}30,000
The excess amount received over the nominal value represents share premium.
3
Determine the ledger posting entries for the receipts.
Debit Cash/Bank Account with ₦150,000\text{₦}150,000, Credit Share Capital Account with ₦120,000\text{₦}120,000, and Credit Share Premium Account with ₦30,000\text{₦}30,000.
Double-entry rules require crediting nominal capital and capital reserves separately for share issues at a premium.

Key Concept

Accounting entry for issue of shares at a premium
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Topics

Issue of Shares at Par, Premium, and Discount

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