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Issue of Share on Premium

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Last updated date: 09th Apr 2024
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What is the Issue of Shares at Premium?

Issue of shares at the premium means the amount demanded by the company at the time of issue of shares is more than the face value of shares. It may serve as the security money or the goodwill money which is being demanded by the company. For example - the face value of shares is Rs 10 per share, but the company issues it for Rs 15 per share. Here the Rs 5 charged additionally by the company is the premium amount. So when the shares are issued over and above the face value of the share is said to be issued at a premium.


Journal Entries to be Passed at the Time of Issue of Share at Premium

Date

Particulars

LF

Debit

Credit


At the time of receipt of application money

Bank A/C Dr.

To Share Application A/C



XX



XX


Application money allotted for shares

Share Application A/C Dr.

To Share Capital A/C

To Securities Premium A/C



XX



XX

XX


Allotment Money Due

Share Allotment A/C Dr.

To Share Capital A/C

To Securities Premium A/C



XX



XX

XX


Allotment money received

Bank A/C Dr.

Calls in Arrear A/C Dr

To Share Allotment A/C



XX



XX

XX


Call Money Due

Share First and Final Call A/C Dr.

To Share Capital A/C

To Securities Premium A/C



XX



XX

XX


Call money received

Bank A/C Dr.

Calls in Arrear A/C Dr

To Share First and Final Call A/C



XX



XX

XX


How to Utilise the Securities Premium Account

As per Section 52(2) of Companies Act 2013 states that premium on issue of shares can be used for:

  1. Issuing fully paid-up bonus shares

  2. It can be used while writing the preliminary expenses of the company

  3. Writing off the expenses of, or the commission paid or discount allowed on any issue of securities or debentures of the company

  4. Providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company

  5. In purchasing its own shares that are buyback of shares

Presentation of Securities Premium Reserve Account in Balance Sheet

Securities premium amount is capital in nature which means it is not received frequently by the company. Hence, when the shares are issued at a premium, it is credited to the securities premium received in the account. It is shown under the head shareholders fund under the subhead reserves and surplus. It is shown under the Equity and Liabilities part of the balance sheet as per Schedule III of the Companies Act 2013.


Solved Questions

1. MNO Ltd. invited applications for 40000 equity shares of Rs 10 each, and the complete amount is payable at the time of application at the premium of Rs 2 each. The issue was fully subscribed, and shares were duly allotted. Pass the journal entries.

Solutions:

Journal Entries to be Passed at the Time of Issue of Shares

Date

Particulars

LF

Debit

Credit


At the time of receipt of application money

Bank A/C Dr

To Share Application and Allotment A/C

(Being receipt of application money)



480000



480000


Application money adjustment for allotment of shares

Share Application A/C Dr

To Share Capital A/C

To Securities Premium A/C

(Being application money adjusted)




480000




400000

80000



2. Neeta Ltd invited applications for issuing 1500 shares of Rs 10 each at a premium of Rs 3 per share payable as follows: Rs 4 on application, Rs 4 on the allotment (including premium) balance on the first and final call. Applications were received for 1500 shares. All money was received as and when due. Journalise.

Solutions:

Journal Entries to be Passed at the Time of Issue of Shares

Date

Particulars

LF

Debit

Credit


At the time of receipt of application money

Bank A/C Dr

To Share Application and Allotment A/C

(Being receipt of application money)



6000



6000


Application money adjustment for allotment of shares

Share Application A/C Dr

To Share Capital A/C

(Being application money adjusted)




6000




6000




Allotment Money Due

Share Allotment A/C Dr

To Share Capital A/C

To Securities Premium A/C

(Being allotment money due)



6000



1500

4500


Allotment money received

Bank A/C Dr

To Share Allotment A/C

(Being allotment money received)



6000



6000



Call Money Due

Share First and Final Call A/C Dr

To Share Capital A/C

(Being first and final call money due)



7500



7500


Call money received

Bank A/C Dr

To Share First and Final Call A/C

(Being first and final call money received)



7500



7500


Conclusion

The Securities Premium Amount means the excess of the issue price of the share over and above the face value of the shares issued. The amount of securities reserve received is the capital receipt in nature. The provisions of the Companies act 2013, it restricts the usage of the securities premium money. If nothing is mentioned in question regarding the receipt of money of premium it is deemed to be received at the due of allotment money.

FAQs on Issue of Share on Premium

1. Are IPO (Initial Public Offer) shares issued at a premium?

Yes, the IPO (Initial Public Offer) shares are issued at a premium. In fact, almost all the shares issued in IPO (Initial Public Offer) are issued at a premium. Premium is the amount above the face value of a share. For e.g. A share with a face value ₹10, issued at ₹250/- Here, ₹240 is the premium per share.


This premium is recorded under “Reserves & surplus” in the Balance sheet, and the product of the number of equity shares and the face value is shown under “Share capital” in the Balance sheet.

2. What is meant by the issue of shares at discount?

When shares are issued at a price lower than the face value, they are said to be issued at a discount. Thus, the excess of the face value over the issue price is the amount of discount. As per the Companies Act 2013, a company shall not issue shares at a discount except as provided in section 54 for the issue of sweat equity shares. Any share issued by a company at a discounted price shall be void. Where a company contravenes the provisions of this section, the company shall be punishable with a fine. 

3. Can a private limited company issue equity shares at premium to new shareholders? If yes, state the conditions which the company has to follow.

Yes, the private limited company can issue equity shares at a premium to new shareholders. The conditions which are required to be taken care of are:


Firstly, it must be authorised by the articles of association of the company to further shares at the premium. Secondly, it must be issued while taking into consideration the authorised share capital of the company, and if the authorised capital is less than the desired, then the authorised capital must be increased by complying duly with the provisions of the Companies Act 2013.