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

Merit Global Limited issued 80,00080,000 ordinary shares of nominal value ���5.00\text{���}5.00 each at a discount of 10%10\%. If all the shares were fully subscribed and paid for, what is the total amount to be credited to the Ordinary Share Capital account?

  1. ₦400,000\text{₦}400,000Answer
  2. B
    ₦360,000\text{₦}360,000
  3. C
    ₦440,000\text{₦}440,000
  4. D
    ₦40,000\text{₦}40,000

Answer

The amount credited to the Ordinary Share Capital account is ₦400,000\text{₦}400,000.
When shares are issued at a discount, the Share Capital account is credited with the total nominal (face) value of the shares (80,000×₦5.00=₦400,00080,000 \times \text{₦}5.00 = \text{₦}400,000). The cash received (₦360,000\text{₦}360,000) is debited to the Bank account, and the discount allowed (₦40,000\text{₦}40,000) is debited to the Discount on Issue of Shares account.

Step-by-Step Solution

1
Calculate the total nominal (face) value of the issued shares
Total Nominal Value = 80,000×₦5.00=₦400,00080,000 \times \text{₦}5.00 = \text{₦}400,000
According to double-entry principles for share issues, the Share Capital account is always credited with the nominal value of the shares issued.
2
Calculate the discount per share and net cash received per share
Discount per share = 10% of ₦5.00=₦0.5010\% \text{ of } \text{₦}5.00 = \text{₦}0.50. Issue price per share = ₦5.00−₦0.50=₦4.50\text{₦}5.00 - \text{₦}0.50 = \text{₦}4.50.
To determine the cash inflow and discount amount for accounting entries.
3
Determine the accounting entry for the share issue
Debit Bank with ₦360,000\text{₦}360,000, Debit Discount on Shares with ₦40,000\text{₦}40,000, and Credit Ordinary Share Capital with ₦400,000\text{₦}400,000.
The share capital account reflects the legal capital created at nominal value.

Key Concept

Accounting Entry for Shares Issued at a Discount
Estimated Time:1m 30s
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Topics

Issue of Shares at Par, Premium, and Discount

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