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2.2.3.2. At Premium
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Today, we'll start with the types of shares a company can issue. Can anyone tell me what equity shares are?
Equity shares don't have a fixed dividend, right? They pay based on the profit?
Exactly! Equity shareholders get dividends that vary with profits. And what about preference shares?
They have a fixed rate of dividend and get paid before equity shareholders?
Great! Now, remember: for equity, think 'Earnings vary', and for preference, 'Priority pays'.
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Let’s now discuss the issue price of shares. Who knows what it means?
It's the price at which the company issues its shares, either at par, premium, or discount!
Correct! And when shares are issued at a premium, the extra amount above the face value is recorded where?
In the Securities Premium Account!
Awesome! Remember the mnemonic 'Structural Profits' for Securities Premium!
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Create a free accountNow, how do we record the journal entry when shares are issued at par?
We debit the Bank Account and credit the Share Capital account.
That’s right! And what changes if the shares are issued at a premium?
We also add the Securities Premium Account for the extra amount!
Fantastic! Remember: 'Deposit Share Securities' for these steps in issuing shares.
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Create a free accountLet’s talk about forfeiture. What happens if a shareholder fails to pay their calls?
The shares can be forfeited!
Exactly! And if we reissue those shares, what should we keep in mind?
They can be sold at a discount, but not for more than the amount we forfeited!
Correct! Use the phrase 'Forfeit to Reissue' to remember the process.
Overview
Short Summary
This section discusses the process of issuing shares at a premium and covers the accounting procedures involved.
Medium Summary
The section focuses on the specifics of issuing shares at a premium, detailing accounting practices and journal entries associated with this process, including forfeiture and reissue of shares.
Detailed Summary
At Premium
In this section, we explore the concept of issuing shares at a premium, an important aspect of a Joint Stock Company's financial operations. Shares can be issued at various prices, including at par, at a premium, or at a discount.
Key Points Covered:
- Types of Shares: Equity shares vary in dividend distribution based on profit, while preference shares have a fixed dividend rate.
- Accounting for Share Issues: When shares are issued at a premium, the amount above the face value is recorded in the Securities Premium Account. For example, if a share with a face value of ₹10 is issued for ₹12, the premium of ₹2 is credited to the Securities Premium account.
- Issues of Forfeiture and Reissue: If shareholders fail to pay calls, the shares may be forfeited and can later be reissued, potentially at a discount, not exceeding the amount forfeited.
Understanding these concepts is crucial for accurate record-keeping and financial statement preparation.
Audio Book
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Create a free accountIssued at more than face value. Ex: ₹10 face value issued at ₹12 Securities Premium A/c is credited with excess.
Detailed Explanation
When shares are issued at a premium, it means they are sold for a price higher than their face value. For instance, if the face value of a share is ₹10 and it's issued at ₹12, the difference of ₹2 is the premium. The accounting entry reflects this by crediting the Securities Premium Account, which is a separate account that records this excess amount paid by the shareholders.
Examples & Analogies
Imagine you are selling a limited edition toy that typically costs ₹10. If you sell it for ₹12 because it's unique, the extra ₹2 is like a bonus or premium that people are willing to pay for the special item. In accounting, this extra amount is noted in a separate account to show the value beyond the regular price.
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Create a free accountExample: If a company issues shares with a face value of ₹10 at a premium of ₹2, the total amount received for each share is ₹12.
Journal Entries:
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On Application: Bank A/c Dr. ₹12 To Share Application A/c ₹12
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On Allotment: Share Application A/c Dr. ₹12 To Share Capital A/c ₹10 To Securities Premium A/c ₹2
Detailed Explanation
When shares are sold at a premium, specific accounting entries need to be made. First, when the application money is received, the total amount (in this case, ₹12 per share) is recorded as a debit to the Bank Account. Then, on allotment, the share capital is credited at the face value (₹10), and the excess (the premium of ₹2) is credited to the Securities Premium Account. This ensures that both the share capital and the additional premium are accurately reflected in the financial statements.
Examples & Analogies
Think of it like a concert ticket. If the ticket's face value is ₹100, but due to high demand, you sell it for ₹120, the ₹20 difference is like the premium. When you cash it out, you record the ₹100 as your base income and the extra ₹20 in a separate premium account. This way, you can show both how much money you made from ticket sales and how much came from its popularity.
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Key Concepts
Core takeaways and short definitions to help you quickly recall the key ideas from this section.
Equity Shares: Shares without a fixed dividend, dependent on profits.
Preference Shares: Shares with fixed dividends and priority for payments.
Securities Premium: The additional amount received above face value upon share issuance.
Forfeiture: The process of taking back shares if payment is not made.
Reissue of Shares: The process of reselling forfeited shares, potentially at a discount.
Examples
Step-by-step examples to apply the section's ideas and test your understanding.
Example 1: A company issues 1,000 equity shares of ₹10 at a premium of ₹2. The journal entry would reflect both the Share Capital and Securities Premium accounts.
Example 2: If a shareholder fails to pay the first call on their shares, those shares can be forfeited. After forfeiture, if the shares are reissued at ₹8, they cannot be sold for less than ₹8.
Memory Aids
Interactive tools to help you remember key concepts
Stories
Flash Cards
Glossary
Equity Shares
Shares that do not have a fixed dividend. Dividend varies based on company's profits.
Preference Shares
Shares with a fixed rate of dividend and priority over equity shareholders in payment.
Face Value
The original value of a share as stated on the share certificate.
Issue Price
The price at which shares are offered to the public (can be at par, premium, or discount).
Calls
Amounts payable in installments for shares—like Application, Allotment, and Final Call.
Securities Premium Account
An account reflecting the excess amount received over the face value of shares issued.