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

Danube Maritime Plc issued 50,00050,000 ordinary shares of ₦2.00\text{₦}2.00 nominal value each at an issue price of ₦2.50\text{₦}2.50 per share. All shares were fully subscribed and the money was received in full. What is the correct accounting treatment for the total excess proceeds of ₦25,000\text{₦}25,000 received above the nominal value?

  1. Credit the Share Premium Account and present it under Reserves in the Statement of Financial Position.Answer
  2. B
    Credit the Profit and Loss Account as revenue profit available for dividend distribution.
  3. C
    Credit the Ordinary Share Capital Account to increase the total nominal share capital balance.
  4. D
    Debit the Bank Account and treat the amount as an administrative expense in the Income Statement.

Answer

The total excess proceeds of ₦25,000 must be credited to the Share Premium Account and presented under Reserves in Equity within the Statement of Financial Position.
When shares are issued at a price above nominal value, the excess amount is a capital gain (receipt) known as Share Premium. This amount must be credited to the Share Premium Account and classified under Capital Reserves / Equity in the Statement of Financial Position.

Step-by-Step Solution

1
Calculate the share premium per share and total share premium
Premium per share = ₦2.50 - ₦2.00 = ₦0.50 per share. Total share premium = 50,000 × ₦0.50 = ₦25,000.
Determines the portion of proceeds that exceeds nominal value.
2
Determine double entry for the share issue
Debit Bank ₦125,000; Credit Ordinary Share Capital ₦100,000; Credit Share Premium ₦25,000.
Nominal value goes to share capital, while the excess goes to the capital reserve account.
3
Identify financial statement presentation
Share Premium is shown under Reserves (Capital Reserves / Equity section) in the Statement of Financial Position.
It is a non-distributable capital reserve under company law.

Key Concept

Accounting for Share Premium
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Topics

Issue of Shares at Par, Premium, and Discount

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